How to Actively Use Your Money to Increase Your Happiness
With many households currently struggling to cover their rising living costs, a pay rise would give a very welcome boost to many people’s well-being.
But, if you are in the fortunate financial position where your household income already exceeds your expenditure, how much difference would a pay rise actually make to your happiness?
THINKING IT THROUGH
We spend considerable time with our clients discussing the link between money and happiness as it is one of the main ways your money can be translated into real life.
Income and expenditure are two sides of the same coin. The more you want to spend, the more you will need to earn and vice versa.
If we take the view that our expenditure can be divided into “essential expenditure” and “discretionary expenditure”, then so can our income.
And if our current income already covers our essential expenditure, it should follow that any pay rise will either be allocated to discretionary expenditure or to saving for our future.
Research into the diminishing marginal utility of income suggests that as income increases, people gain a correspondingly smaller increase in life satisfaction and happiness.
This feels intuitive simply by thinking about the sort of discretionary items we might spend that extra on.
A £10,000 family holiday is unlikely to be ten times better than a £1,000 one. A £60,000 car and a £15,000 car should both get you safely and comfortably from A to B.
Or you could invest the surplus.
THE SHORT TERM REALITY
That might (and should) give you a warm, virtuous feeling, but it is unlikely to give you an immediate happiness boost, given that the main beneficiary of this is your future self not your present self.
It is also worth remembering that the tax man will take a pretty large slice of any pay rise you get.
Let us say that you get promoted and your income jumps from £100,000 to £120,000 p.a. That is a big 20% rise.
After tax, though, this promotion “only” translates into an extra £21 per day and there will no doubt be a cost to this in terms of extra pressure and responsibility.
That is not to say that you shouldn’t accept the promotion, of course. If you could put all of this pay rise into your long-term savings, it could go a long way to sorting out your retirement.
But, if you already have a comfortable life on your original £100,000 salary, the leap to £120,000 is unlikely to give you a big happiness boost.
DON'T FORGET THE WIDER IMPACT ON YOUR HAPPINESS
And if that change of job comes with something that is known to detract from our happiness, a longer commute for example, it may even be counterproductive in happiness terms.
Researchers found that the average person would need their income to increase by more than a third to cover the reduction in happiness associated with going from no commute to a twenty-minute commute.
Thinking about this purely in terms of your life satisfaction, you might explore the idea of accepting the pay rise, but at the same time reducing your working time to four days a week. That way, you are exchanging a monetary increase for an extra day of free time every week. It doesn’t work in all professions and a concern can be that five days of work might then just get squeezed into a very stressful four. But it’s worth considering. It might work for you.
If your income defines you and you see it as a sort of scoring system, it would be worth reviewing “Zeroing in on the dark side of the American dream”. This found that “aspiring to the American Dream of ﬁnancial success has negative consequences for various aspects of psychological well-being” and that “the negative consequences were particularly severe for the domain of family life; the stronger the goal for ﬁnancial success, the lower the satisfaction with family life, regardless of household income”.
The Americans refer to pay as “compensation”. What loss are we being compensated for (health? time? soul?) and does it follow that the more “senior” our role becomes, the more we potentially stand to lose if we do not go into it with our eyes open and really understand the trade-offs?
If you would like us to help you put together a strategy for how you can proactively use your financial position to improve your life satisfaction and happiness, please give us a call on 020 3488 9505.
The value of your investments can go down as well as up, so you could get back less
than you invested.
Tax and Estate planning is not regulated by the Financial Conduct Authority.