How much is enough?

A core aim of financial planning is to achieve financial independence. For most people this means having sufficient set aside for a comfortable life without reliance on earned income. 

Yet the notion of a comfortable life is fairly subjective. To answer this truly will require reflection and insight not often engaged in by most.

Knowing what a comfortable life looks like will help you tackle the important question; how much is enough?

Obviously the answer to that will be different for everyone. For some it may be a number but for others it will be more of an ideal.  As often with planning, there’s real value from the time spent considering the answers. Clarity brings wellbeing.

Money and happiness

For some people the pursuit of money is a life goal, for others it seems to have no relevance beyond providing essentials. Most of us are somewhere in between.

It is fair to say money does not bring happiness on its own. Research has shown how the accumulation of wealth for its own sake does not increase our sense of fulfilment.

More accurately it could be said that having enough money to do what we really want creates happiness.

The lottery winner survey

Back in 1979 researchers in the US studied 22 major lottery winners and 29 paralysed accident victims. They sought to understand if happiness is relative to circumstances.

In the study participants were asked about levels of happiness before and after their life changing event.

We may reasonably expect the lottery winners to be happier than the accident victims

In fact the results were more interesting; the people from either group who said they were happy before the event said they were happy after (following a period of adjustment).

Those who were unhappy before were unhappy after.

This is partially because of that annoying tendency we have to get used to the things that once made us happy; a concept know as the hedonic treadmill.

Stick to the plan

For some the hardest financial skill is getting the goalposts to stop moving. Social comparison is often the main problem.

Research by Morningstar found that certain mental factors such as the frequency, and target of social comparisons had strong associations with financial well-being. Their analysis showed social comparison impacted financial well-being more than a person’s income level, age, gender, or education.

Who you compare yourself with and how often you make these comparisons can have a huge effect on the way you feel about your own circumstances.

Although a financial plan can’t stop you from comparing with others, a plan can help to change the direction and target of your social comparisons and so allow more-positive emotions associated with finances.

Making progress along a clear path towards important personal goals is a foundational part of financial wellbeing.

Conclusion

Maybe the most important lesson from this research is to suggest just how bad people are at predicting what will make them happy.

What makes us happy will change over time as we move through life. The priorities of life that give fulfilment at age 20 are likely to be different at age 40.

From this perspective planning is a process, not an event. A financial plan is a snapshot of your life at that point time. The important task is to regularly take stock of progress, review the plans and adjust as necessary.

Barra Gorman

Chartered Financial Planner