Using Your Money To Be Happier

This is probably the most important video I'll ever make. I hope it will change your life the same way that researching it changed mine. I used to think that working, saving, and investing were all about getting as much money as possible. Don't get me wrong, money is a powerful tool. We need at least enough money to live and money can solve some problems, but more money is not in and of itself the main goal of personal finance. Personal finance is about funding a good life, which is subjective, but there is a lot of evidence about what generally speaking constitutes a life that people will evaluate as good. The crazy thing is that a lot of the common perceptions about what makes life good are at odds with reality. I'm Ben Felix, chief investment officer at PWL Capital, and I'm going to tell you about the ingredients to a good life. This might seem like a weird topic for a chief investment officer to cover, but how you spend your time and money and how you invest are informed by the life you want to live. Think about some of the big questions that people have to answer every day. Is a higher paying job with longer hours and more stress worth it? Is YOLOing on this stock trade for a small chance of a big win worth the risk? How should you prioritize saving for the future against enjoying life today? Should you rent or own your home? Should you buy a cottage? Does it make sense to pay for a house cleaner or meal delivery? These are important questions that can't be answered in a spreadsheet. The thing is though, and this is what I think gets missed, there is a lot more to a good life than a higher income and more wealth. A good life is subjective. My good life is not necessarily your good life, but there is lots of research on what does and does not tend to contribute to good lives for most people. The research on this is positive rather than normative. That means it doesn't tell people specifically what to do. It examines empirically what tends to make people evaluate their lives as good. It's like giving you the ingredients, but not the exact recipe to a good life. You have to come up with your own recipe. When we're talking about a good life, broadly speaking, there are two ways to measure it. Experienced or hedonic happiness and reflective or eudaimonic happiness. You know experienced happiness when you feel it. It's how you'd answer the question, how do you feel right now or how did you feel yesterday? Reflective happiness is related to how you evaluate your life. It's how you'd answer the question, how do you rate your current life on a scale where zero is the worst possible life for you and 10 is the best possible life for you. There's a very clear distinction between feeling good right now and evaluating your life as good overall when you reflect on it. But both are important to what I would call a good life. For example, you could have a life that you evaluate positively when you step back and think about it because you have a good job, a nice house, maybe a family, but you're stressed out through most of the day and you're kind of miserable. Or you could spend all day every day drinking beer in a hot tub, having a great time, but be disappointed in your life when you step back and reflect on your overall position. That tension between the two types of happiness makes defining a good life kind of complicated. But there is a model from the field of positive psychology, the perm of the model, which is a model of human wellbeing that goes a long way to organizing it. The factors in the model don't have optimal allocations. Like it's not like Markowitz portfolio theory, uh, for any individual, they just tell us what tends to contribute to wellbeing. The factors are positive emotion, engagement, relationships, meaning, accomplishment, and vitality, which was added later. Positive emotion is feeling good. You know, when you feel it like eating a good meal or enjoying a walk outside engagement is getting lost in a challenging task that matches your skills known as a state of flow. Relationships is having strong, reliable relationships with friends and family. Meaning is belonging to and serving something bigger than yourself, like being involved with your community. Or for some people, a religious group accomplishment is achieving hard things that are pursued for their own sake. A classic example is mountaineering. It kind of sucks to do, but you feel great once you reach the summit and people do it just to achieve it. Vitality, uh, which I mentioned, was added later is basically eating well, sleeping well on exercising. A lot of people get stuck in the trap of thinking that if they can just get a big promotion at work, win big on a stock trade or win the lottery, that their life will just become good, but that's not how it typically works. And the pursuit of money itself can actually have unfavorable implications. There's no doubt that we need a certain level of income to live, but beyond that money and a good life have a bit of a complicated relationship. There was an influential 2010 study on a us sample that found that life evaluation rises steadily with income. Well experienced happiness rises with income up to about 75,000 us dollars and then plateaus. That would be around 112,000 us dollars today. The authors conclude that high income buys life satisfaction, but not happiness, like life evaluation, but not, not experienced happiness. And that low income is associated with low, both low life evaluation and low emotional wellbeing. Then there was a 2018 study that identified what they called points of income satiation above which experienced happiness and life evaluation stopped increasing in their sample. The income satiation point for life evaluation was about $105,000 for North America in the study, which is around $137,000 today. Well experienced happiness was about $65,000 or $85,000 today, just based on inflation. In this study, some parts of the world, including North America, where I am, see a decline in life evaluation at the highest levels of income. The authors suggest that individuals with higher incomes may be less happy, not due to their higher incomes, which why would that make you unhappy? But due to having more demands on their time, less time for leisure activities and increase in materialistic values, increased social comparison, which I'll talk more about later, and other life changes associated with higher incomes, like living in a more expensive neighborhood, which counterintuitively is not great for happiness. A 2021 study on a us sample using real time reports through a smartphone app that asked multiple times per day, how do you feel right now? Finds that both experienced and reflective happiness do increase with high income with no observed satiation point. These results suggest that higher incomes are associated with both feeling better day to day and being more satisfied with life overall to reconcile their findings. The authors, this is a pretty cool thing. The authors of the 2010 and 2021 studies teamed up for a 2023 paper that they called an adversarial collaboration. So they had these conflicting results and they actually got together and tried to reconcile. So they reexamined each other's results and they worked toward an understanding of, of why there were such significant differences. They found that happier people experience increased wellbeing at higher levels of income, but less happy people do see that happiness plateau at higher levels of income. So happy people, your, your happiness keeps increasing with income. People who are not happy generally, uh, their income, their happiness does increase with income up to a point, but then it plateaus like that original study found. Now important points to note on these studies is that they're looking at the relationship between log scale, income and happiness. I think this is often missing these discussions. That means that each point on the income scale is a doubling of income, not a linear increase. We're not talking about getting a, an inflation raise. We're talking about doubling your income. And even with those big jumps in income, the relationship between income and happiness is, is weak. The correlation between average happiness and log income is 0.09 in the experience sampling data and the difference between the medians of happiness at household incomes of $15,000 and $250,000 is about five points on a 100 point scale. These are small differences. The 2010 paper compares income to other elements of life to see how they affect happiness relative to each other and finds that an approximately fourfold difference in income is about equal to the effect of being a caregiver for a disabled or elderly family member. It's about twice as large as the effect of being married and about equal to the effect of a weekend and less than a third as large as the effect of a headache. Given the small effect, it's not surprising that people tend to overestimate how much happier they would be with a higher income. I think people often get stuck in that trap. If only my income were higher, even the wealthiest households tend to believe that they would need a lot more wealth in order to be perfectly happy, which is like, it's crazy. People focused on extrinsic objectives like money, fame, and image as opposed to intrinsic objectives like growth, intimacy and community tend to be less happy in general and tend to overestimate the emotional benefits of achieving their extrinsic goals. I think we can conclude that while having more money is good, it's not that good with respect to wellbeing and happiness. And the pursuit of money for its own sake is actually likely to be detrimental to living a good life. Incredibly across all these studies, the researchers found that the happiest participants were subscribed to this YouTube channel. They didn't actually find that, but you should still subscribe to this channel. All of this makes setting financial goals, designing the life you want to live a bit of a minefield. And it's compounded by the fact that people are really bad at predicting what will make them happy in the future. A big reason is adaptation. People generally adapt quickly to changes in their life circumstances, even to big financial changes like winning the lottery, big financial goals like buying a bigger house or moving to a more expensive neighborhood might give you a short term burst of happiness, but will likely fade quickly. This is the hedonic treadmill. We've all heard about it. Another issue is that we tend to focus on one big thing that we imagine in the future, like buying the house or a cottage or reaching a retirement savings goal. We don't think enough about how those things, how achieving those things will affect how we spend our time, which is more predictive of happiness than stable circumstances. A further complication is that personalities, values and preferences change over time, but people tend to believe that they have recently become the person that they will remain for the rest of their lives. This is called the end of history illusion. It's crazy. It's like people today imagine that they are, they're stable. This is how they're going to be for the rest of their lives while also acknowledging that they have changed significantly throughout their lives. And people of all ages have this perception. It's a fascinating phenomenon. So that's, that's the end of history illusion setting out to achieve some big future goal that your current self sets like an early retirement or a major purchase in the distant future might not end up resonating with your future self. So you make sacrifices and whatever you, you overcome obstacles to achieve some big longterm goal. And then you get there and you're like, Oh, this is maybe not what I actually wanted or maybe it didn't make me, it make me as happy as I was expecting. So given the challenges and predicting the circumstances that will make us happy in the future, and even knowing who we will be as a person in the future, it can be sensible to focus on how financial decisions will affect how we spend our time rather than striving to achieve a perfectly imagined future, particularly when the path to getting there makes today unpleasant. It is important to note that while people generally adapt to their circumstances, good and bad, some things are harder to adapt to noise, especially variable or intermittent noise interferes with concentration and increases stress. Even after years of commuting, people who commute in traffic arrive at work with higher levels of stress hormones. This is relevant for anyone considering a move further away from work or family introducing a longer commute to which they will not adapt in order to get a bigger house, which they will tend to adapt to quickly. Not being in control of your circumstances has a large negative impact on happiness and life satisfaction. Maintaining a feeling of control may be relevant in the rent versus buy decision for housing, which I'll talk more about in a minute. And in achieving financial independence. Another sneaky drain on happiness is social comparison, which can have immediate impact on your finances. While we may not like to admit it, our wellbeing is affected by how we compare to those around us. And many people maintain a lifestyle that is outside of their means, driving down their savings rate and putting even the most affluent households in precarious financial positions driven by social comparison, aside from avoiding those negative circumstances and avoiding the issues with social comparison. Remember that the elements of a good life are positive emotion, engagement, relationships, meaning, and accomplishment plus vitality. Money buys a bit of happiness, but not as much as people expect and how we spend our time has a big impact on our wellbeing. Let's apply these ideas to some major financial decisions that affect how people spend their time and money. Time and money are somewhat exchangeable. We can spend time working to earn money and we can spend money to save time by outsourcing tasks or buying time saving products decisions about the time money trade-off are some of the most impactful decisions that people can make empirically people who prioritize time over money, meaning that they're willing to sacrifice their money to have more time by, for example, choosing to work fewer hours and make less money rather than more hours for more money are happier. They have a greater social connection. They have a better relationship with their spouse and they're more likely to choose work that they enjoy given the choice to spend some money to save some time or work a little less to get some time back. Choosing time over money is generally a good decision that leads to less money, which is the fascinating thing about this stuff. A worthwhile exercise is asking yourself whether how you are spending your time contributes to your version of a good life. And if not, whether you can trade money for time to fix it. Housing is typically the largest single expense for most households, and it's a basic human need. Owning a home can offer stability, particularly if you want to stay in a specific area for a long time. It does also give you more control over your environment. I put a full size basketball hoop in my house, like a glass backboard and everything. It's kind of crazy. I would not have done that in a rental. I'm not going to lie. It's pretty cool. However, I have also enjoyed all of my past rentals with no basketball hoop. There are gyms that I can go to to play basketball. Broadly speaking, based on studies in Canada and Switzerland, owning a home does not make homeowners happier than renters when you control for all the other stuff that could affect happiness. In an American sample of 600 women, homeowners were not happier than renters and spent less time on enjoyable activities. In a German sample, while homeownership did elevate life satisfaction, it did so much less than people anticipated it would when they made the decision to buy the house. Owning a home also affects how you spend your time. I can tell you this with certainty as a homeowner, it's like having a second job. Even if you outsource a lot of the work, it's no joke. Some people love that stuff, which great for them. I actually don't mind house maintenance stuff, but I don't like it when it takes away from the time I want to use to do things that I like more. As a renter, you just wash your hands of that stuff. You call the landlord and it gets fixed for anyone making the rent versus own decision for housing. The notion that it will improve your life should be approached with caution. A common related decision is buying a cottage. Cottages are often viewed as a place for family to gather sometimes for generations, which does hit on the relationships element of a good life. Being outside in nature is also related to positive emotion. However, it's important to think about the details. Who are you going to invite to the cottage? What if some family members don't get along? Who will take care of the maintenance? How bad will traffic be leaving the city on Friday afternoons with two kids in the backseat? These details will likely be more predictive of happiness than the fact that you own the cottage. When deciding how to spend discretionary money, we have a choice between broadly speaking experiences and things. Spending on experiences when they are positive is more impactful to increasing happiness than spending on things though negative experiences have the opposite effect. If we come back to the primer model, this makes a lot of sense. People are happy when they're engaged in what they're doing and experiences can provide that kind of engagement. Experiences are more likely than things to be shared with other people and strong relationships are important to happiness. Reflecting on past experiences enhances mood more than reflecting on past material purchases and people tend to remember and anticipate experiences more than things. It's also harder to adapt to experiences than things since each experience is unique while things are static. Not all things are bad to spend money on, but I think it's worth asking how the thing will contribute to your good life. The biggest goals for most people are financial independence and financial security. This makes sense because they put you in control, at least as in control as we can pee in life. Still lots of unpredictable stuff, but saving for financial independence, which is necessary for most people, it is the right objective to have. It's competing with spending today. That present versus future trade off is another one of the biggest decisions that people make every day. Achieving financial independence sooner is good. All else equal, but it has to be balanced against living the life that you want today. It's also worth considering that as long as you're able to do work that you enjoy, work has a lot of benefits. It can contribute to engagement, meaning and accomplishment. Some studies show that people who retire lose their sense of purpose while other studies do show that people leaving lower income and less satisfying jobs gain a sense of purpose. This matters because planning to work longer at a job that you enjoy makes more spending available today. I'm not saying you should spend all your money today, but it's important to carefully consider the type of work that you do, how long you plan to work and how that will impact your spending and saving decisions. One of the best ways to deal with the inability to predict what will make us happy in the future is to make more frequent, small experiential purchases rather than fewer large material ones, particularly when they contribute to positive emotion, which could be things like savoring a coffee engagement, which could be spending on a hobby relationships, which could be taking a friend out to dinner, meaning which could be spending on your community and accomplishment, which could be something like paying for a course that you want to complete. Knowing that how we spend our time is more predictive of happiness than how we spend our money. A simple test for expenses is to think about how it will affect how you spend your time and whether that relates to your definition of a good life. Another longer term lens that can help us understand what tends to constitute a good life is regret. People like to say they live with no regrets, but regret is powerful. Unlike other negative emotions, regret cannot be experienced without having made a choice. In research for his book on regret, Dan Pink found in a large us sample that people's regrets most commonly involve family, romantic partners, education, career, finances, and health. And most people regret their inactions more than their actions. In an academic paper on regret, the authors find in a representative at us sample that regrets involving romance are the most common followed by family, education, career, finances, and parenting over time. Regrets about action tend to dissipate doing something. I, Oh, I did a thing and I regret it. That tends to go away. Regrets about inaction that something that you did not do that you wish you had done. Those tend to linger. They don't tend to go away. That can be relevant for financial decisions where playing it safe today on things like starting a business or declining an exciting job offer lead to missed opportunities. Those types of inactions can feel kind of painless in the short run, but you know, I'm not going to take the job now. I'm not going to start the business, but those are the types of regrets that lead to more longterm pain that it's harder to recover from. You look back and think, Oh, if only I had done that, things would have been different. A lot of regret comes back to compounding small decisions day to day that lead to a state that is hard to reverse in the future, eating poorly and not saving enough for our examples where the immediate effect is minimal. You eat a burger instead of a salad, whatever, or you, you spend your money instead of saving it today. So it's not a big deal day to day, but eventually it's too late to reverse heart disease or build up your retirement savings when you're 60 years old. Part of the problem here is that the human brain is not wired to think about the effects of compounding, making the longterm effects of those daily small decisions really hard for us to process. We don't realize how impactful those small decisions are going to be until it's too late to do something about it. Okay. With all that background on what contributes to a good life, the last thing I need to talk about is setting goals. If I ask you what your goals are, you probably won't be able to tell me, even if you think you can, you might tell me your goals, but when prompted properly, people often realize that their goals, the ones that they state, when I ask you the question fall short of what they actually care about. There are a couple of ways to elicit more meaningful goals. A big one is using categorical prompts, showing people categories that financial goals might fit into. Another is the use of a master list, a comprehensive list of goals collected from many other people who have set their own goals. In 2022, I conducted a study where I asked 310 people, largely listeners of my podcast to write down their goals. They were then asked to double the list of goals after the first pass. And they were then presented with the PERMA-V model of wellbeing as potential goal categories. Again, PERMA-V stands for positive emotion, engagement, relationships, meaning, and accomplishment. When you ask someone what their goals are, they might say, I want to retire. But when you say goals might fit into these six categories, they tend to come up with more meaningful goals. They get closer to what really matters. Using the data from my study, Morningstar's behavioral research team found using natural language processing, that after being introduced to the PERMA-V model, people tended to list deeper goals that reflected their values rather than more surface level goals, like wanting to retire. My study also resulted in a master list of goals that people can still find on the PWL Capital website. This master list can be used in addition to the PERMA-V categorical prompts as part of a structured goal setting process. Understanding your true goals is important because the path to getting there might be very different from the path to achieving some other surface level goal or the uncharted path of doing whatever feels right in the moment. People are responsible for making financial decisions, which typically involve time and money multiple times each day. This is not an easy task since we are wired to make quick decisions that result in short-term pleasure and improve our status relative to those around us. Even the noble objective of setting long-term financial goals is easily sabotaged by our inability to identify a complete set of personally important objectives and our weak ability to know what will make us happy in the future. Stepping back to reflect on how our decisions will affect life satisfaction and happiness requires more effortful thought, a model to understand what a good life looks like, the PERMA model that I've talked about and a plan to achieve it. The first step in funding a good life is finding a good life. I hope this video is a starting point.