September 2020

All right everyone I’m Logan Allec, I’m a CPA, and today, as usual, I want to talk to you about money. Now I know you’re thinking that all of my content is about money and you’re right. But one question I’ve had, and I’m guessing some of you have had, is whether I have the right attitude toward money.I’ve worked around money my whole life, and I know some people end up feeling like they work for their money more than their money works for them. And what I mean by that is that it’s easy to get wrapped up in whether you have enough money, whether you’re putting enough away for retirement, whether you’re going to be able to pay off your debts, things like that.Financial Stress—More Common than You ThinkIn fact the National Endowment for Financial Education found that nearly 90 percent of Americans are stressed about money, which I think while understandable given world events right now is really sad in a country that has so much wealth.What Can I Do About It?Now, everyone is in a different situation, I don’t want to say that I can fix all of your financial problems and turn you into a millionaire.But no matter what your financial situation looks like right now I think it can help to take a step back and understand the role money plays in all of our lives. So with that in mind this article is going to be all about how much money you really need to be happy and what you can do to build a more positive relationship with your finances.Money Doesn’t Equal HappinessOne thing that stood out to me while I was prepping this piece is that there isn’t exactly a perfect relationship between money and happiness. Yes, earning more will lead to more happiness up to a point. But once you reach that point it turns out that more money doesn’t actually buy happiness.There’s a study on this issue from Nature Human Behavior, it was published in January 2018. The researchers looked at 1.7 million people around the world to analyze the relationship between their income and their subjective happiness. And they found that on average, money only led to better emotional health up to an annual income of roughly $60,000 to $75,000, and it only led to a more positive life evaluation up to something like $95,000.What’s the Difference Between Emotional Health and Life Evaluation?I know that the distinction between the concept of “emotional health” and the concept of “life evaluation” might sound a little vague, so let me kind of explain this before moving on.Basically life evaluation, which people felt more positively about up to an income of $95,000, is how someone feels about their life as a whole. It has to do with questions like are you satisfied with the way your life has gone in general.Emotional health, which people felt more positively about only up to an income of about $60,000 to $75,000, is more concerned with how you have felt recently in your day-to-day life. This is a key difference from life evaluation, which is not how you feel in your day-to-day life but how you feel about your life as a whole.So to determine emotional health, the researchers asked specifically about how people felt yesterday, how many positive and negative experiences did you have, how much happiness, how much enjoyment, how much smiling, versus how much stress, how much worry, and how much sadness.How Does Money Really Affect Well-being?So one takeaway here, and it is corroborated by another study that I’ll share with you in a bit, is that while one’s “emotional health,” how one feels on a day-to-day basis, isn’t so dependent on income, one’s life evaluation, or how they feel about their life as a whole, not on a day-to-day basis — and I’ll give an example of the distinction later in the article — but one’s life evaluation appears to be a bit more sensitive to income.Money Goes Further in Some Places than OthersOf course this could vary from one place to another, and people who live in wealthier countries like the US, and even within the U.S. those who live in areas with higher costs of living, tend to need more money to feel satisfied.There’s No Magic NumberAnd personally, having read this study, I’m not sure if $60,000 or $75,000 or $95,000 is any kind of magic number. Rather than focusing on the number I think the important takeaway here is that after a certain threshold more money doesn’t really have as much of an effect on happiness as one might think.Overvaluing Money Is CounterproductiveIn fact if you’re focusing on your income beyond those levels, there’s a chance you’re letting your money control you instead of the other way around. Again I don’t want to tell you how to spend your money, and I know $95,000 a year can mean very different standards of living in different places. Here in L.A. as well as in places like New York or Hawaii or the Bay Area, a family of four or five could really struggle on $95,000 a year. In some other parts of the country that could be great, but again the point is that there’s a certain point where the marginal increase in happiness decreases with each additional dollar of income.So just like you can underestimate the importance of personal finance and good money habits, I think it’s possible to go too far in the opposite direction as well and become obsessed with money and financial gain in an unhealthy way.Earlier ResearchNow, the Nature Human Behavior study actually corroborates the results of an earlier study which was completed by Princeton in 2010. So the numbers are a little outdated now, but at that time they found that even though people evaluate their lives more positively as they earn more money, their emotional well-being plateaued at around $75,000 per year.And regardless of the specific number the point of these studies is that once you have enough money to not stress about it quite as much, it really doesn’t matter that much in terms of well-being whether you earn even more.Is Money Useless?Of course this isn’t to say that more money is meaningless. A raise would still be nice, maybe you’ll have the opportunity to retire early, travel more, or something like that.But in terms of happiness the gap between $40,000 and $60,000 for example is much larger than the gap between $100,000 and $120,000 or between $500,000 and $600,000. So at a certain point, once you’re financially comfortable, earning more money just isn’t going to have the same positive effect on your well-being.Focusing on the PresentNow, one really interesting point that the Princeton team brought up is that people respond very differently depending on how the question was phrased.A lot of surveys ask questions like “How satisfied are you with your life as a whole these days?” and in that case the answers get more positive as you move up the income scale. People who are earning more report higher levels of satisfaction, they tend to feel better about their lives in a removed sense.But that trend disappears above the income threshold I mentioned when you replace that question with a question that asks about how they felt yesterday. So the answers are very different depending on whether you ask about their lives in general or about how they felt yesterday.MethodologyMore specifically, the researchers involved in this study as well as the researchers involved in the study in Nature Human Behavior used what’s called the Cantril Self-Anchoring Scale to measure life evaluation.This scale asks respondents to imagine a ladder with steps going from zero to ten, with zero being “the worst possible life for you” and ten being “the best possible life for you.” From there, respondents say where they think they are on that scale right now and where they think they will be in five years.In these cases people don’t feel like they are as satisfied as they would be with a higher income, but it turns out that they have basically the same level of happiness in terms of their day-to-day life. This goes back to the study I mentioned earlier that compared emotional health and life evaluation.Money and Happiness in PracticeNow, I promised you an example illustrating this distinction because it can be confusing. If you’re working 80-hour weeks, which sucks, but you’re earning $300,000 a year, which is awesome, you might feel good about your life in the sense that you’re achieving your financial goals. You might feel like you’re pretty high up on the ladder, you may have a very positive life evaluation of how your life has gone on the whole.Emotional HealthBut at the same time in terms of your “emotional health,” how you felt yesterday, and in your everyday living you could be experiencing a lot of stress. So one of the takeaways of this study and others like it is that more money might help you feel more satisfied about your life from a kind of overall or long-term perspective without necessarily helping you to feel any happier in your day-to-day life.Social PressureNow part of that might just be the fact that we tend to place a lot of value on a high salary, earning more means you can spend more, there’s definitely a social element to wealth. But on the other hand there’s real value in having more money regardless of what you want to do with it.How to Use Extra Money EffectivelyEven if you’re already comfortable, there’s a lot you could do with an extra $10,000 per year whether it’s traveling, donating to charity, putting more away for retirement, or anything else.So I think that explains why people with higher salaries have a more positive outlook toward their lives as a whole even though they don’t necessarily feel happier or less stressed right now. Money can’t prevent stressors from coming up but it can give you the tools to manage some of them more effectively, especially over the long term.Key TakeawaysWith that in mind I think the main goal in personal finance shouldn’t necessarily be to make the most money or even to save the most money, even though those can be really good strategies. Instead I would recommend trying to make the changes you need to get to a point where your money is making you as happy as possible.Recognizing that Time Is Often More Valuable than MoneyIf you’re working a full-time schedule and earning $120,000 per year and you have the opportunity to cut down to 30 hours per week for $90,000, and you can still provide a fine life for yourself and your family and save for the future, even though you’ll be earning less money you might be happier in your daily life. Of course not everyone has the option to scale down their hours like that but we all have some flexibility in the way we approach our finances.Developing Financial LiteracyNow one of the problems here is that most Americans simply don’t have the financial education they need to understand how their money is impacting their lives. The 2019 Consumer Financial Literacy Survey from Harris asked people about their financial habits.It’s a pretty detailed report, but there are a few data points that I think are worth mentioning. First, they found that more than half of the American population struggles to manage their debts, which makes sense given that we have roughly $14 trillion in consumer debt, including over $820 billion in credit card debt alone. People have to fight just to stay out of debt, yes in some cases because they don’t have enough money, but also because they aren’t aware of the implications of getting into debt and how much it actually costs.In fact according to Experian more than three-quarters of Gen Z respondents feel that their high schools should have offered more financial education. So a lot of people feel like they were given access to credit cards, loans, mortgages, things like that without ever receiving the information they needed to use those tools effectively.Increasing WagesThis article isn’t just about financial literacy, I don’t want to get up on my soapbox here, but I do think it would be surprisingly simple to help more people avoid money-related stress, especially when we live in one of the richest countries on Earth. We could push for better wages, particularly at lower income levels, in order to bring more people higher up on the curve, especially since these studies demonstrate a very strong correlation between larger incomes and higher rates of satisfaction in the lower and middle classes.Implementing Financial EducationBut we could also implement more financial education in schools, maybe even adult education for everyone who missed out on these resources when they were younger, and give people the tools they need to make smart financial decisions throughout their lives because at the end of the day how much money you need to be happy ultimately depends on how efficiently you use that money. If you make millions a year and blow it on substances and phony friends, you’re not going to be satisfied, but if you make far less than that and you make good choices, you can find happiness in that.So all in all even though I would never tell you to decline a raise or anything like that, I hope this piece gave you some perspective on the real relationship between money and happiness. Yes money can buy happiness, or something like that, up to a certain amount, whether it’s $60,000 or $75,000 the cutoff seems to be somewhere in that range, and of course there are so many variables here depending on the size of your family and the cost of living in your area.But at a certain point even though people with higher incomes feel better about their lives at a high level, they don’t report any significant difference in well-being on a day-to-day basis. If you ask them “are you satisfied with the way your life has gone,” then high-income Americans will tell you they’re more satisfied than middle-income Americans. But if you ask them how much happiness they experienced yesterday, how much they laughed, or how much they worried, well that gap disappears almost entirely.So if you’re financially comfortable, whatever that means for you, I would advise you to start looking for ways to make your money go further instead of just looking for ways to earn more of it, though that is of course important as well. And for those of you who want to start making those adjustments I recently released a video where I talk about the steps involved in creating your first budget, and you can click this link to see that video.Now everyone has different feelings about money, obviously these are just my opinions, so I would love to hear about the difference more money has made for you and whether it has really led to more happiness. So don’t forget to let me know about your experiences in the comments, and as always make sure to stay tuned for more updates.

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Month: September 2020

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