How Much Money Does it Take to be Happy?
There is ongoing academic research regarding how much money it takes to be happy, or at least satisfied, with one’s financial life. While the numbers vary, at a certain point, studies show that increases in annual income no longer seem to bring greater happiness.
Most of our clients earn beyond that “should be happy” range, and most of them seem to indeed be pretty happy. Earning enough to reach that base level of satisfaction or happiness is what I call Level 1. I believe that there are two more satisfaction levels to strive for beyond that income goal; living within your means, and achieving financial independence.
Level 2, living within your means, looks different based on one’s means, but let’s define it as having enough to pay taxes, reduce debt appropriately, insure what's important, save for the future, and have enough cash on hand to prevent the emergency use of credit cards or liquidation of investments. From a discretionary-spending standpoint, it’s spending less than what’s left over after fulfilling the obligations you have committed to.
Level 3, being financially independent, is having the ability to live off of one’s investments and any passive income – essentially, not having to work for a living. This is driven by net worth as well as standard of living; a lower standard of living can be supported by a lower net worth. An interesting exercise is to establish what standard of living your assets would support right now. It may not be where you ultimately want to be, but the knowledge of when, technically, you could be financially independent increases happiness significantly. Especially if it's right now.
Before we declare a client financially independent (able to retire), we confirm what it takes to support their standard of living, stress-test the assumption with various investment returns and inflation rates, imagining unexpected future expenses, and testing different life expectancies. Then we check in periodically to be sure spending is still in line with initial estimates and the numbers are still working.
Knowing where you stand, financially, is a significant factor in financial satisfaction, no matter which level you are currently working on. Helping clients reach this understanding is one of our greatest pleasures.