Money and Happiness: What's the Right Balance?

When I talk to my Bates students about careers, their most common concern is that they won't make enough money. I'm always saying, Oh, the money will work itself out. If you love what you're doing, you don't need that much money to be happy. Chill out, financial stuff isn't as complicated as it seems. Apparently I'm not much of a pragmatist.

Or, more accurately, I take my relationship with money - and my understanding of the money-happiness link - for granted. Which is ridiculous. We need to get the money issue out in the open. Enough of the idealistic musings. It's time to stop being polite. And to start getting real. (Sorry, I couldn't resist.)

First a caveat:  if your innate desires honestly lead you toward a lucrative career path, if you're independently wealthy, or if you have some dirty-dealings way of making money on the sly, then you don't need this lecture. If you're instead like the rest of us - poor folk obsessed with doing "good" or "creative" work in fields that pay peanuts - then read on.

Step One: Understand How Much Money Actually Buys Happiness

Money cash

What I always tell my students - that money isn't that important, in terms of life satisfaction - is the truth. We know that happiness doesn't increase when incomes rise above about $50,000 to $75,000 a year (dependent on geographic region). It's also true that if we don't compare ourselves with people around us, we may be able to be happy with even less.

Furthermore, as we've discussed, happiness comes from having a sense of meaning and regular access to activities to that put us in the blissful state of "flow." Given that we spend about 90,000 hours at work over our lifetime, many of us choose to discover both "flow" and meaning through our work. Unfortunately, though, many careers that provide meaning and personal "flow" pay pennies. How, then, do we strike a balance between happiness and money?

Step Two: Determine How Much Money You Need

We must each find our own personal money-and-happiness balance. What's "enough" money for your friend may not be "enough" for you. I, for one, was determined to minimize the "enough" in my life because I recognized early in my working life that being a slave for money wasn't going to cut it. In fact, the first day I taught at Bates I came home and wrote in my journal, "No amount of money is worth my time." (I was a rebellious, self-righteous little snot, wasn't I?)

In order to figure out how much money you need, you of course have to do some basic budgeting. That's so not what we do here at CA101, but if you want to know more about budgeting, I'd recommend the excellent personal finance blog from your classmate, Chelsea, No Debt Brunette.

I'm instead interested in the psychology behind personal finance (shocker!). With that in mind, here are some questions to ask yourself as you determine how much money you actually need:

  • What does "basic survival" mean to you? Psychologists consistently find that we only need enough money for "basic survival" in order to be happy, including having food, clothes, and shelter. I'd argue that in America, definitions of "basic survival" vary greatly from person to person. For instance, you might not be able to imagine your life without your iPad or iPhone; they may very well feel like "basics" to you. I, on the other hand, don't have an iAnything other than two iPods that are both over five years old. What are the "basics" to you? The fewer things that you put on the "basics" list, the less money you need to achieve your "basic" standard of living.
  • Do you have a financial safety net? This comes in many forms, such as an emergency fund that you've somehow managed to save up, parents who you know would bail you out if things really fell apart, assets you could sell if push came to shove. The bigger your safety net, the more risks you can take, including accepting "dream jobs" that don't pay very well.
  • Is social comparison a major factor in your life? Be honest with yourself:  can you sit next to someone who is talking about her brand new Mercedes and her newly refinished hardwood floors and feel OK with your 12-year-old Hyundai and carpeted home? I, thankfully, can; that's precisely what you'll find in my garage and in my home. But if  you can't stand this, then you'll need more money to strike your money-and-happiness balance.

Once you know your own personal tolerance for financial risk and financial need, combined with raw figures for what you'll need to meet those psychological requirements, you'll have the first draft of your Big Fat Number:  the amount of income you need per year.

Step Three: Find Your Personal Balance Between Money and Happiness

Not so happy with your Big Fat Number? Is it quite...big? Well now you have a choice:  try to find a career that will match that number (even if said career makes you miserable in the process), or else change your Big Fat Number. (I might suggest the latter...)

You can change your Big Fat Number in two ways:

  1. Change your psychological approach. All of the factors listed in Step Two are within our control. We can choose to change our conception of what constitutes "basics," we can work to build an emergency fund (e.g., by taking a more lucrative job for a set period of time and diligently putting away every penny beyond what's needed for our basics in order to buy our own freedom), and/or we can learn to compare ourselves to others to a lesser degree.
  2. Control your spending. When I was in my early twenties, I worked on personal finance as diligently as I worked on my career. I read up on personal finance strategies (my faves:  How to Survive Without a Salary, The Average Family's Guide to Financial Freedom, and The Millionaire Next Door), tracked our expenses down to the dollar, and even made ridiculous pie charts comparing our budget to our spending, which I then presented to my husband at annual official budget meetings. (The poor guy is a good sport.)

Step Four: Re-Evaluate Your Money-Happiness Balance As Your Life Circumstances Change

The part that is shocking me - the thing that is throwing me for a total loop at this very moment in my life - is that once you've found your initial Big Fat Number, then worked with psychological and financial strategies to whittle it down as low as it can go, it'll keep shifting around on you. The Big Fat Number is a slippery little devil indeed.

Scales of Justice

For my husband and me, our combined Big Fat Number was pretty small, enabling us to pursue highly meaningful and self-directed careers for almost fifteen years of our lives. Then we had a child. And now it's all out of whack. (Case in point:  we owe 2.5 months worth of my take-home pay in taxes at this very moment based on an online tax calculator. 2.5 months! In case you thought this money post was coming from out of the blue...)

Now that our Big Fat Number has increased, does that mean I have to look for work that is less personally meaningful? I don't know. I haven't found the answer. For now I'm trying to squeeze a bit more out of the questions I listed in Step Two - e.g., maybe our "basics" became too "non-basic" once we brought home the child over whom we wanted to dote, or maybe I am now too driven by social comparisons since I hang in mom circles, which are notoriously comparison-based.

This is life:  you figure it out, then it goes changing on you. And I think that's why, when my students ask about money during our career talks, I sort of blow them off.  Because you do not have to make life and career choices that get the financial picture "just right forever." You simply have to create a financial outlook that is "good enough for the next year or two or three."

But even that takes a lot of effort. A fact I am finally, finally conceding.

Next class, though, back to pie-in-the-sky idealism. I'm so much more comfortable with my feet firmly off the ground. As long as there's a little change in my pocket for the flight.

How are you striking the money-happiness balance in your life?

My salary tends to be counted in change. (Photo credit: @Doug88888)

What's your ideal balance? (Photo credit: DonkeyHotey)