Have you ever played the why game with a child? You know, where the child just keeps asking why, and it either ends with a “because I said so”, or some witty way to end the constant loop. If you let it play out long enough, you might just reach an interesting answer to “why” on whatever concept you were discussing. When it comes to financial planning what is that why? We budget, why? We invest, why? We care about the market going up down and sideways, why? My thesis on why we do all these things boils down to one thing: life-long satisfaction.
I had this concept in my head, and mentioned it to my friend, and I knew it was worth exploring when he brought up the same concept to me a couple weeks later. That concept is how we take the discipline of financial planning to maximize our life-long satisfaction. Financial planning is just the science of placing every dollar in its respective spot to achieve that satisfaction. So, when breaking down all that is encompassed in financial planning, I came up with my own straightforward conclusion. Every action taken, budgeting, saving, investing, giving, and spending should do one thing – increase lifelong satisfaction. But that is hard to measure or visualize. So, let me share how I tend to think of it.
Meet the Happiness Curve
So, let us take a step back here, and bear with me it may get mathy. In economic talk, the arbitrary unit of satisfaction from consuming/utilizing a good or service is called a “util”. Now that is quite wonky and does not fit what we are trying to explain. For our purposes, every dollar spent gives you “happiness units”, and so with every dollar you spend you will forever be trying to reach the max happiness units. Pretty simple right? We just have one more factor: time. If we plot happiness units on the Y axis of a graph, and time on the X we can create a Happiness Curve chart, where more area under the curve equals more lifetime satisfaction. So, to the seven-year-old asking you “why” when you tell them you are budgeting the answer should be “to maximize the area under the happiness curve”. Ok maybe as a parent that is not the best answer, but it is essentially the real answer to “why” we do financial planning. Let us look the implications of this perspective, and how it can redefine how you look at money.
Running the steps of financial planning through this happiness curve approach reveals two major things.
First thing you notice is that “time” is a major player. You want to retire with 20 million in the bank? Easy. Save 80% of all your income and live only on bare necessities. Done. Finance is so easy. But wait, if you looked at that happiness curve, you would get an extremely one-sided chart, not maximizing the area under the curve. Putting planning practices under the happiness curve chart you can better understand the tradeoff being happy today and being happy tomorrow.
Not Optimal
One day, the career ends, and the dollars stop rolling in. Do you have enough in retirement savings to keep the level of pre-retirement spending? Buying a new car today may make you happy now, but if it cuts off more area under the curve then it adds, it is a bad financial move. On the flip side, penny pinching, or working at career you hate can take away from the happiness curve. Therefore, financial planning is not about maximizing dollars, but maximizing happiness. Which brings me to the second conclusion we can incorporate from the happiness curve.
Optimal
What really drives your happiness? What really adds to the happiness curve? If buying a new car or going on that trip really elevated your happiness that much, no adviser or friend, or that one guy bragging about his experience, can tell you it was not worth it; now, a good adviser or friend, should express to you the tradeoffs. By examining what drives your satisfaction it becomes clearer how you should utilize your dollars. I have said this in my previous blog, the challenge in financial health is learning more about yourself. A caveat though, is perceived happiness versus real happiness. Oft purchasing material things feels like obtaining happiness, but it is misguided. Again, close people in our lives should help check our blind spots, just like a having a workout partner helps in the gym. So, what increases that happiness curve for you? Luxury cars? Travel experiences? Giving money away? A niche hobby? Investments? Obviously, it should not be one answer, but rather a diversification of things. And yes, it can be a bit overkill to ask yourself, “does this improve my life satisfaction” when determining which peanut-butter you should get, but the principle is still valid. (hint: chunky peanut butter is way cooler than smooth). How I use my dollars may be different than yours, and that is totally fine.
Getting a raise, saving on taxes, achieving a higher investment return, these are all crucial aspects to financial longevity. But it is not the end game. These items have to do with saving, multiplying, and stretching dollars, not how to use those dollars. 20 million in an account means nothing if the happiness curve is not the biggest it can be. I hope to have made you consider the implications of your dollars to the happiness curve next time you think about making a purchase, or financial decision. Does it really maximize my long-term life satisfaction? Maybe you can have an answer for that seven-year-old child when they ask you “why” next time.
As always, let us know if you have any questions on planning, wealth management, investing, on financial strategies. Burkholder Wealth Management strives to give you the most opportunity to max out your happiness curve.
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