The Ultimate Alternative Investment: Happiness

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What is the point of accumulating financial assets if they don’t make you and those around you happy?  Though our nation’s total net worth has never been higher, our individual levels of anxiety are moving in the opposite direction.

Real financial planning is so much more than pontificating about the benefits of a low-cost, globally diversified portfolio. While this is very important, most people are not interested in the intricate details of each investment they own. What they really want to know is if they are going to be okay and, more importantly, if have the means to enjoy their lives.

This is where the happiness portfolio comes in. It is a perfect and vital behavioral complement to a well-constructed group of financial assets. Your financial portfolio is the ticket; your happiness portfolio is the means to cash in your chips.  One does not work without the other. Follow this behavior allocation and you will be richer than you ever imagined:

Buy Experiences: The data shows experiences make people happier than the purchase and consumption of material goods. A big reason for this is experiences make us more connected to others and help us form pleasant memories. They give you a story to tell and are even more powerful if they fit with your sense of self. Surprisingly, even bad experiences can have a positive effect on long-term happiness. If you learn a valuable lesson, you will determine the pain was more than worth the price. Experiences should be the core of your happiness portfolio. Load up the truck with vacations, trips, movies, sporting events, and other activities you can share with others.

Invest in Others: Data shows the average ratio of personal to pro-social spending is more than 10:1. The facts show money devoted to yourself rather than others is unrelated to personal happiness. A reliable predictor of happiness is the amount of money you give away. This link is universal. The connection is worldwide. The data has proven this connection in 136 countries and among all levels of socioeconomic backgrounds. The more people invest in others the happier they are. In addition, people, who have charitable inclinations have been found to be healthier and wealthier than average.

When you spend on others it gives you the psychological feeling of wealth because you feel you can afford to take these actions. You become healthier because selfish actions are positively correlated with increases in cortisol. This is a hormone the body produces that is connected to high levels of harmful stress.  Your happiness portfolio should have generous positions in charitable giving, volunteer work, and gifting to deserving family members.

Purchase Time: Evidence has proven the sacrifice of time, to save small amounts of money, leads to a miserable existence. Driving out of your way to save a small amount is not worth the trip. The tension and stress from shopping and (especially) commuting are not worth the price. Research has suggested people with more money do not spend it in ways that create happiness on a day-to-day basis.

The U.S. Census Bureau has determined most people spend more time commuting than they do on yearly vacations. Another destructive belief is the idea that “time is money.” This takes the joy away from things that you enjoy. The idea that your time always must have an economic value will deprive you of many of the simple joys of life. Instead, add these to your happiness portfolio: paying someone to do tasks you hate; taking time to stop and smell the roses;and having  shorter commute.

Pay Now and Consume Later: Data has proven that more joy comes to us from looking forward to the future, rather than things we have received in the past. Anticipating experience brings great joy to your life. The saying “Everything looks perfect from far away” has a great deal of validity. Most people will look at the experience of anticipating a vacation in a happier way than when they look back at the experience. A path to happiness is to postpone consumption and overvalue the present. Pay for delay.

Lots of debt is a sure path to financial and personal misery. The practice of consuming immediately and paying later is a destructive road to follow. Evidence has proven what we owe is a bigger predictor of happiness than what we earn.  Studies have shown that high levels of debt are a leading cause of miserable and failed marriages. Do yourself a favor; limit your debt by paying for things in advance. Your marriage and your financial portfolio will thank you later.

Hold a Decent Amount of Cash: According to research, maintaining a healthy level of cash improves our feelings of financial well-being and life satisfaction. This is true despite your age, income, spending, employment and total wealth. As Michael Kitces notes, “stated more simply, wealthy people with very little in cash may still feel more financially distressed than poor people with (relatively) more cash!”

While taking out a low-interest mortgage might make financial sense, paying for the house in cash may increase your daily quality of life and contribute to higher level of overall happiness. While “liquid wealth” may not make you financially rich, it will take a huge amount of dangerous illness-inducing stress out of your life. Make sure you have enough cash in your happiness portfolio despite what the so called “experts” might say.

You can determine the amount of time and energy you want to allocate to these five different components according to your individual circumstances.

At the end of the day as long as you are maximizing the happiness potential from your financial assets, you will end up richer than you ever dreamed.

Source: Happy Money: The Science of Happier Spending by Elizabeth Dunn and Michael Norton