The Joy of Wealth

Here's an insightful story from Stop Acting Rich: ...And Start Living Like A Real Millionaire:

While I was promoting The Millionaire Next Door on the Oprah Winfrey Show, a rather well dressed woman from the audience asked me the same question I had heard a thousand times before: "What good does it do to have all this money if you don't spend it?" The woman was agitated, even indignant, that I was touting frugality. She further indicated that "these people couldn't possibly be happy." She, like most people who are not wealthy, believed that the more one spends, the more satisfying life is. Thus, more money translates into more spending and therefore more happiness. But she does not completely understand the benefits of being wealthy. It has much more to do with being financially independent and secure than owning prestige brands. High self-esteem is related to achieving financial independence. Both the sense of achievement that comes from success and financial independence lead to happiness and life satisfaction, not meaningless badges.

What percentage of the millionaires who live in homes valued at under $400,000 are happy? More than 9 in 10 (91%) indicate that they are extremely satisfied with life.

I wanted to publish this set of comments because I get this sort of reaction quite often. People imagine that "spending less than you earn" or "living below your means" is a horrible, deprived lifestyle that people force themselves to suffer through simply because they want to be wealthy. And along the way they don't spend a cent on anything enjoyable, so ultimately they end up dying wealthy, but have wasted their lives in a miserable existence.

Let me make a few comments to hopefully set the record straight:

• I have never seen any research that shows spending higher levels of money makes people happier (if there is some, I'd certainly like to look it over.) So we can dismiss the notion that spending on the "finer things in life" automatically leads to happiness.

• I do know that people often worry about their financial situations and that this can cause great personal stress (which is very unhealthy) as well as marriage/family problems (money difficulties is always listed as one of the main reasons for divorce). So having a lack of resources is certainly a problem for many. And who has a lack of resources? Those people who spend a lot of money -- specifically, those who spend close to or more than they earn. As such, spending a lot of money might actually be more closely related to unhappiness rather than happiness.

• Why is it assumed that in order to spend less than you earn that you have to deprive yourself of enjoyable things you'd like to do? This is simply not the case. Consider these two people:

• Joe earns $50,000 a year.
• Joe needs $40,000 for his "needs" in live -- food, clothing, shelter, transportation.
• Joe spends $10,000 a year on all the fun and extra "stuff" he can buy.

• Jim earns $75,000 a year.
• Jim needs $40,000 for his "needs" in live -- food, clothing, shelter, transportation.
• Jim spends $15,000 a year on "fun" stuff -- vacations, entertainment purchases, etc.
• Jim saves $15,000 $20,000 a year.

Joe spends everything he makes with no savings or financial cushion at all. He's the classic "spend all you can" American. Jim, on the other hand, keeps his base spending low (it's the same as Joe's, even though Jim earns 50% more). This gives him room to spend a good amount on "fun" things (more than Joe spends) and still save a boatload of money. Of course this is just an example -- he could save more or less or spend more or less, but you get the idea.

Sure, it's easier for him to do this because he makes more. That's why I highlight the fact regularly that we all need to be working to make the most of our careers. A higher income allows us to "do it all" -- cover our needs (assuming we've kept them under control), spend some on enjoyable activities, and still save to build wealth.

• Many people enjoy the "simpler things in life" and don't have the same standards for "enjoying life" as others. For me, I'd just as soon spend a long vacation with family sitting around and chatting on the front porch (and relaxing) rather than take a whirlwind tour to Europe. And guess which one costs far less? Some would say I'm missing out, but I don't think so. I'm building great relationships and loving what I'm doing. That doesn't mean I won't take a big vacation now and then (we're actually planning a trip to Europe in the next three years), but it's not a regular occurrence for our family. We enjoy time together more than anything else and that's just as easy to do (and far less expensive) on a friend's boat in Lake Michigan as it is sitting on the beaches of Hawaii. But like I said above, it's not an either/or choice. Just refer back to Jim's situation for a reminder.

• As noted above, there is a true enjoyment in simply being financially secure. I couldn't agree more with the statement that "success and financial independence lead to happiness and life satisfaction."

Any of you who have achieved financial security have anything to add?

Comments

[Money Beagle]

I think that having more money available doesn't ensure happiness, but what I've looked at it is that it gives you greater flexibility and more opportunities. For example, if I made, say, 25% more than I do now, I might consider adding some spending items. I certainly wouldn't blow the entire 'extra' amount, but I might consider adding things like a cleaning service for our house. Cleaning isn't something we mind doing, but if we were to have that time available to do something that we enjoy more, it would (in theory) improve the 'joy' that we get from life.

[Money Reasons]

While I'm not wealthy, I'm debt free... Just being debt free reduces my stress level! I'm sure being financially independent would change my entire outlook on life!

[Sarah]

I agree - having more money available would reduce stressful parts of life, and would increase happiness in that aspect.

Having a cleaning service would reduce the stress I feel on the weekends to spend my time cleaning the house instead of spending it doing fun activities with my children.

Having more money in the bank would reduce the stress I feel from having a car get to the end of its useful life (something I'm experiencing right now).

That being said - it is not spending the money that brings the happiness, and given the option I would spend the money to buy myself more time to do activities I enjoyed, as opposed to spending it on more expensive items. With working full time and having small children, time is a very valuable commodity.

[Mary Kate]

Any of you who have achieved financial security have anything to add?

So much of what people do is following others (keeping up with the Jones). It seems like a sheep mentality. Almost everything in America has become a business including graduations (starting with pre-school and kindergarten), college-prep, college, weddings, etc. People have forgotten that more is not always more.

We tend to question the status-quo instead of just going along with it. We live beneath our means, are debt-free, are able to tithe and be generous with family and friends, and have a chunk saved for retirement. We do not deprive ourselves we just don't go along with the conventional wisdom without questioning it.

Thank you for your excerpts from the book and your additional comments. I have been working on teaching our high schooler the difference between an expensive lifestyle and real wealth (high income vs. high wealth).

[Rob]

Being in debt definitely adds stress to your life. I am greatly looking forward to the day we are debt free! That alone in my opinion is worth spending less than you earn.

[Tyler]

Why do people think 'keeping up with the Jone's" means buying stuff? I want to 'keep up with the Jone's", well I want to beat them. To me that means acquiring more wealth not more stuff. I'm hyper competitive, and desire relative wealth, not stuff.

FMF- I too enjoy sitting on the patio for a week vacation (with wine!). Travel to me is not a vacation. This being said, I've traveled the world, and I can assure you, there is massive value in a trip to Europe or someplace in this world.

[Doug L.]

I completely agree with your perspective on happiness from financial independence, rather than material ownership. Ample savings pretty much eliminate the stress caused by money.

[Doug Warshauer]

While it's easy to dismiss question of the woman quoted on the Oprah Winfrey show, there is some use in trying to understand her perspective, if only because, if we judge people by the behaviors rather than their speeches, she appears to be speaking for the majority, who will not say publicly (or even to themselves)what they really believe.

Human psychology appears to be very resistant to the message of frugality. It runs counter to some very significant psychological drives such as competitiveness, the desire to accumulate possessions, and the need for immediate gratification. Those of us who write about personal finance can and do make logically persuasive arguments for frugality, but these arguments do not seem to significantly change people's behavior (though of course there are individual exceptions.)

I'm not sure what the solution is, but this is a problem I think we need to take seriously.

[Arimack]

Not to be anal but you're a little off on your math. Joe is correct while Jim loses $5,000 somewhere:

Joe $40,000 + $10,000 = $50,000
Jim $40,000 + $15,000 + $15,000 = $70,000 not $75,000

Frugality can be overdone but just because you are not over frugal does not mean you have to be frivolous. I think most of your readers, judging by the trend in comments over the last year or so, take care of the savings first but do spend on themselves for entertainment and fun. Being smart and saving does not preclude spending on yourself every once and awhile. Entertaining yourself simply comes before saving for some and after saving for others. I prefer to be the other and save first.

[KH]

What I have observed is that, many times, those supposedly "non-consumer values" that you mentioned actually also have price tags.

If you want to travel or sit on the deck drinking wine, if you want to stay home with your kids, if you want to work part time and enjoy life or volunteer, if you want to donate money to your church or quit your job and work at short-term missions or go to Haiti and help out---you neeed to consider the cost of these things and if you can really afford it.

Even if you spend virtuously and not on tacky stuff like iphones and large screen TVs you can still end up in trouble if you spend more than you can afford.

There is an illustrative article in Salon.com today about a veterinarian whose just lost her & her family's house to foreclosure. http://www.salon.com/news/mortgage_crisis/index.html?story=/mwt/pinched/2010/07/12/dream_home_in_foreclosure

Most of the article concerns her mourning what appeared to be her Ideal Home and Lifestyle, and her trying to say how emotionally awful it is to lose her house because she is losing lots of intangible emotional value and memories associated with her home (which surprisingly she thinks is kind of a novel thing but which I think is not surprising at all and actually is typical of most homeowners.)

However she also describes making decision after decision after decision that were all highly risky financially. She presents these as things she felt she "had" to do, but not for reasons of conspicuous consumption, so apparently she ignored the cost and risk of doing these things.

For example:

1) She and her husband "stretched a bit" to purchase her dream home.
2) instead of a boring tract house (which she still despises apparently, see her description of driving through other neighborhoods as she's leaving her forclosed home) as it was a very old and architecturally significant home on 3 acres--how chic!
3) the home was in the country, requiring her to commute 75 miles each way every day to her job. But hey, she thinks it was "worth it"!
3) She describes how they immediately started tyring to restore the home to its former and appropriate glory--the tacky carpeting and paint and carpeting that covered the old wood floors apparently had to be removed IMMEDIATELY or she couldn't even stand living there. (she thinks the house has a soul) The home also needed significant structural repair, not to mention all major appliances to be replaced, yet she wanted to "save" it's historical value, and she and her husband also had to make sure all the repairs and remodeling were aimed at restoring it's historical accuracy, honoring the home's architectural history and "consistent" and improving the neighborhood (ie they chose very expensive repairs and remodeling options--wide plank floors, leaded glass windows etc, which must have been astoundingly expensive.
4)they took out HELOCs to fund all this, based on the increasing paper value of their home in order to fund these repairs and restorations.

5) In the middle this they had several children and she felt she "had" to take a year off work to be with them even though she apparently was the major breadwinner. She now admits this was kinda stupid, but it was "for the good of the children" , so on the other hand she doesn't regret it because your kids are only young once, you know?

6) her kids "had" to attend private school. She and her husband value education! What else could they do?

7) she describes throwing fabulous overthetop birthday parties for her kids that cannot be cheap...but it was for the kids, and something she'd always dreamed of doing and they all have fabulous memories of that. And you will never have another chance to do this for your kids, so she doesn't regret that either.

8) her husband lost his job and decided to stay home, which she thinks was great for the children even though of course they lost his salary and were dependent solely on hers.

9) her vet practice gradually paid less and less due to factors beyond her control, yet she didn't try to get an additional job or anything. They were squeaking by on bills.

10) her vet practice eventually stopped paying much of anything and they couldn't pay their bills. Apparently this was an awful feeling! They tried to be frugal, but they didn't pay their bills and so they had to move out. oh woe!

11) Near the end you discover that ALL these financially risky and stressful events occured over only *10 years* of her and her husband "owning" the house (!). I find this astonishing. This is such a short time! Why not wait and gradually do some nice remodeling over 20 or 30 years, especially if you have a huge mortgage and just had kids and want to send them to private school etc? It's so bizarre to me that she felt she "had" to do all this in what I consider a really very short time span.

If she had done just any one or even two of the things above in the 10 years they had their house, probably they would be fine. But you just can't have everything! Or maybe you can, but why not do it gradually and pay as you go?

[Old Limey]

I retired comfortably in September 1992 after 32 years as an aerospace engineer and achieved total financial security after the obviously unsustainable almost 1,200% runup in the Nasdaq 100 and associated hi-tech mutual funds between July 1994 and March 2000 as a result of the internet and dot.com bubble - to quote Alan Greenspan, it was irrational exuberance. After getting completely out over the four market days following the peak on 3/10/2000 I have been in conservative investments, and occasionally low volatility junk bonds, ever since. At age 75 I am still saving about $300K every year. The money comes from investments, no equities at all since 11/2007, and now primarily in CDs and municipal bonds that mature on various dates between October 2010 and July 2021. Since it's now hard to find CDs and muni bonds to my liking I invest the interest into two mutual funds, one holds municipal bonds, the other holds government backed mortgage securities. I have always followed the financial markets daily and have all the up-to-date data and tools that are needed.

The reason I reinvest the money rather than spend it is that the two pension checks and two social security checks that arrive every month are more than enough for us to live on when you are debt free and have all the material possessions that you need. The largest two single expenses these days are paying the income tax on the money that we are forced to transfer, every year since we were 70, from our IRAs into our Trust account, and an annual vacation, this year a river cruise starting in Switzerland, going through Germany and ending in Belgium.

To give you an idea of how I spend my days. Yesterday was the day my hiking group rents a luxury motorcoach that costs us each $30. Thirty five of us were driven to a beautiful county park on the California coast between Santa Cruz and San Francisco where, in gorgeous weather, we hiked through a beautiful Redwood forest. The group splits up into small groups according to ability. I go with the fastest group, that the others call, "the Rabbits", and we did a hike I estimate to be about 12 miles. I can't say for sure because my GPS lost satellite coverage in several of the steep canyons we went through. There were just 5 of us, myself and two old friends and two newcomers (each 46) that were still working but had flexible hours. One was a PhD in electrical engineering, the other was an Iranian lady that was also a PhD and a clinical biologist at a local hospital. What more can you ask than to be doing something that's very healthy, great for the psyche, have intelligent conversations, and to meet two very interesting new friends, all for $30.

My wife can no longer hike, after two hip joint replacements, but she spent her day having lunch with an old friend from her teaching days, after a visit to the dentist. Tomorrow is our 54th, wedding anniversary so I will have to take her somewhere special for dinner.

[pekkle]

Old Limey congratulations on 54 years of marriage! Wow ...

[jim]

Arimack : "Jim loses $5,000 somewhere"

Taxes. ;)

[BillV]

A pep talk for those who read Old Limey's and say: "Well he was an engineer and is real smart/lucky with his investments. I can't duplicate that!"
(btw, we all benefit from luck, but I know luck was a small factor in OL's case, if a factor at all)

I say yes you can. I have done all the things we read and talk about here. I kept my net take home low by paying myself first. IRA's, savings bonds and then a deferred comp-457 plan. I live in a large city, didn't need a car. I rented most of my life but in nice but modest places. I didn't scrimp. By some of the stories here, I wasn't frugal to the extreme--but didn't spend wildly. An important element was managing my career.

I took advantage of an early reitement 6 years ago and only occasionaly looked back. (Mostly to say, whew glad I got out when I did ;-) )

I'm not in OL's league. My investments were mutual funds not individual stocks. So far neither my bride not I have had to make withdrawals from our retirement stash because of pensions. And while I am not saving 300k a year, I am saving 80k a year.

Having a pension is major factor for me to be sure. But the single biggest is maintaining as large as possible gap between your income and spending.

There are the unknowns of course: medical bills, divorce, children issues. But not much you can do about that except keep your emergency funds high.

Joe up above does not have to spend all 10k. Even saving the IRA max would help him in the long run and he could still have fun.

Old Limey, congrats on your 54th.

[jim]

Congrats 54 years to you and your wife Old Limey.

[Budgeting in the Fun Stuff]

Old Limey, Congrats on the 54th Anniversary!!! That's inspiring!

My husband and I are financially secure and saving for early retirement, but we also spend a bunch on "fun stuff". It's all about balance and priorities. I highly value financial security, so we hit our savings goals first but we make sure to budget in fun money too. We have personal fun money, joint fun money, and a vacation account. We have our needs paid for, our future planned for, and tons of fun stuff along the way...we simply spend budgeted amounts on our priorities and nothing on stuff that doesn't matter to us.

[wanzman]

Sometimes I wonder about my future. The landscape of retirement savings seems to be much less forgiving for those of us just now getting started. No longer can we count on pensions, and in my opinion, we cannot really count on social security, 2 sources of income that a lot of today's retirees count on for income.

So that means people my age must plan and save 100% on their own. Perhaps this is not much of an issue, except when you considet the fact that the vast majority of folks will probably fail to plan for retirement well on their own, so the government will either have to step in or let these folks live in the streets. This will undoubtedly lead to higher taxes to fund even more entitlement programs.

So the delimma is this....not only must I fund my own retirement 100% without any real planning assistance, I must do this on an income that will continually be reduced by higher taxes in order to pay for those who have failed to plan at all.

I can't wait to reach retirement age (sarcasm).

[David C]

Old Limey, Congrats on the 54 years together. I always enjoy reading your posts and wish you and the missed all the best.

[David C]

Actually, that should be "misses"! Stupid fat fingers!

[LotharBot]

Per FMF's question:

research has shown that Americans are happier the more they earn -- but only up to $60k per year. It's not a big stretch to suggest that "spend" can be substituted for "earn" and the statement will still be true.

In other words, spending on the "finer things in life" doesn't seem to particularly increase happiness, but having enough that you can afford decent housing, reliable transportation, food, and health care does increase happiness.

[Old Limey]

BillV
I actually only traded stocks for a couple of years before I retired and even then the total amount was less than $50K. I tried several methods, one was called CANSLIM and was devised by the editor of Investor's Business Daily, then I switched to following the picks listed in weekly letters from the top two stockpickers rated by the Hulbert Investment Digest. The final straw was putting $6000 from my IRA into a stock at $10/share, listed on the NYSE, and recommended by one of the stockpickers. The stock went up for a few days and then started collapsing. The day I decided to sell I was shocked to find out that it had been delisted by the NYSE because the president of the company had falsified the company's reports by claiming that they had far more retail stores than they did, took all the cash he could lay his hands on, and left the country. My $6,000 eventually turned into $0, how's that for being lucky? Actually it was a cheap lesson because I never touched a single stock after that experience. There were also other stocks that came out with negative earning surprises and then dropped severely before the market even opened.
When you get right down to it, the best things in life aren't bought with money, they come over many years from one's family relationships and the love and togetherness from your closest companion. Once you have got out of debt, have a home that satisfies you, and have no problem paying your bills, having a large portfolio just gives you a lot more security and peace of mind unless you are like one of the celebrities that we are always reading about. It's interesting that Michael Jackson had to die in order to get out of debt and make his heirs wealthy.

[BillV]

Old Limey
Well that does surprise me, I thought you made a big portion based on the program(s) you wrote and buying single stocks. My mistake.
Losing 6k is definitely luck-bad luck of course.
and certainly i know you have had some serious sadness in your life. As have I and most of the readers here.

All in all though, being 62, debt free ( except for a mortgage that is well under control) and not having to work, isn't so bad. No pity party for me.
> ;-}

[Old Limey]

BillV
Since I started subscribing to a database service soon after retiring I have only ever had their mutual fund and market index data. They have a stock database but I have never looked at it and the programs I wrote never accessed it.
In the period I did trade stocks I also received a weekly book of stock charts from Investor's Business Daily, that's what I used when following the CANSLIM method.
Just for the sake of interest, these are what you look for in the CANSLIM method - it's almost a full time job going through all 7 parameters for each stock you are considering - which is why I gave up on it. In my opinion small investors should never trade stocks unless they have insider information.

C stands for Current earnings. Per share, current earnings should be up to 25%. Additionally, if earnings are accelerating in recent quarters, this is a positive prognostic sign.
A stands for Annual earnings, which should be up 25% or more in each of the last three years. Annual returns on equity should be 17% or more
N stands for New product or service, which refers to the idea that a company should have a new basic idea that fuels the earnings growth seen in the first two parts of the mnemonic. This
.... product is what allows the stock to emerge from a proper chart pattern of its past earnings to allow it to continue to grow and achieve a new high for pricing. A notable example of this
....is Apple Computer's iPod.
S stands for Supply and demand. An index of a stock's demand can be seen by the trading volume of the stock, particularly during price increases.
L stands for Leader or laggard? O'Neil suggests buying "the leading stock in a leading industry". This somewhat qualitative measurement can be more objectively measured by the Relative
....Price Strength Rating (RPSR) of the stock, an index designed to measure the price of stock over the past 12 months in comparison to the rest of the market based on the S&P 500 or
....the TSE 300 over a set period of time.
I stands for Institutional sponsorship, which refers to the ownership of the stock by mutual funds, particularly in recent quarters. A quantitative measure here is the
....Accumulation/Distribution Rating, which is a gauge of mutual fund activity in a particular stock.
M stands for Market indexes, particularly the Dow Jones, S&P 500, and NASDAQ. During the time of investment, O'Neil prefers investing during times of definite uptrends of these three
....indices , as three out of four stocks tend to follow the general market pattern.

[Jenny]

I think of savings/wealth in terms of a cake. Having just a plain cake is one thing; having icing (savings) means that you can enjoy the extra taste and relish the cake more. Can't have too much wealth (savings)- if the cake ever gets too sweet, just shave some off. It is a fantastic feeling to think you can get something you want to buy- even if you end up deciding not to buy.

[Cody]

I always enjoy reading and learn so much from your posts, Old Limey! Happy Anniversary and congratulations on 54 years of marriage. I just married the love of my life on June 26th and we look forward to 54 + years together.

[FMF]

Arimack --

Ugh. I hate it when that happens. I'll correct the post.