In the last post, we discussed the mistakes many people make around the role of money in their lives.
Let’s start with mistake 1:
It is not money one must maximize in life, but happiness.
Money sure is one good means to acquire happiness, by allowing consumption, travel, free time etc. But generating money also costs happiness by getting stressed, having no time for friends and family, fearing of losing it etc.
So we have to look at the whole bundle: How much money can I easily generate without sacrificing too much happiness?!
How can I create happiness without any costs at all?
How do I balance creation of happiness and creation of money?
What really does make me happy?
Then there is mistake 2:
Ever more money is not making you ever more happy.
This is not some esoteric coming from my mind and I sure would not decline a lottery win (though I would be careful whom to tell) but it is scientifically proven, by a relatively new and very thrilling branch of economics, called economics of happiness. These guys go back to the roots of mistake 1 and ask:
What does make people happy?
You can google it and later I will add some further reading, but here is in essence what they say about happiness and income:
- Income matters to a certain degree. If you have a very low income, improving your income improves happiness.
- From a certain level on income does not matter anymore. More income will then boost your happiness for a short time only (ca. 3 months), then your happiness level returns to where it was before.
If you ever notices that a pay-raise gave you a kick for a short time only and after some time you thought:”Well that was nice, but now a bit more again would be adequate” – then you are already about the threshold. In economic terms then your situation is: Your long-term additional happiness from additional money is zero.
- Same holds for consumption, the kick from consumption is only short. While a new car is really great in the first months (yeah, I know, I bought a fairly new one last year!), the joy of riding it declines steadily until ½ a year later your daily commuting is as annoying as before. (…Was the same for me unfortunately.) But then, the money is gone, so spend it carefully!
- Your relative income matters more than your absolute income.
This means if you live in a medium neighborhood you will feel more happy with your income than if you move to a posh area with the same income.
In other words: We always compare ourselves to others. So be careful whom you spend time with. Don’t wish to quickly to enter the hip “sex and the city”-society, as you might feel quite miserable there.
- Changes in income are what you recognize more than it’s actual level.
This it similar to what I wrote before. It sounds contra-intuitive, but in terms of happiness its much better to start on a low level, and slowly but constantly move up, instead of being born rich or to win the jackpot that catapults you among the rich.
There is much more to learn from the economics of happiness, e.g. how does TV influence your happiness? How does education or children, or free time or being married?
But let’s stop for the moment, as I really need some idling now… 😉
Come to than in a later post…