Happiness is relative

Vicki Robin, author of the New York Times bestseller Your Money or Your Life, began running finance seminars back in the 80’s. In them she would ask the audience “how much would it take to make you happy,” almost everyone, in every income bracket, said “double what I am making now”. Then, when asked to rate their happiness on a scale of 1 to 5 (scale and ratings below), there was no significant difference between the top and bottom earners. You could hear a pin drop as people realized that the person in the row ahead of them probably had the “more” they thought would make them happy—and it made no difference.

Nobel laureate and best-selling author Daniel Kahneman, in his research on money and happiness, found that beyond a certain level of sufficiency (currently about $75,000 a year in the United States), more money doesn’t buy more happiness.

Understanding this can help you to start changing your mindset around money and consumerism, in order to really cut back on spending in a sustainable way and help you to work towards financial security where you will have more freedom to spend time on the more important things in your life.

Recipe for human happiness

Below is a graphic of the main components different psychologists have found to be the recipe for human happiness.

Ask yourself, how many of these things cost any money? Certainly money can help you be more comfortable but once your basic needs are met, instead of spending money on material things, you could invest that money and spend the time it buys you on the real things that bring you happiness.

Also, have a think about your perfect day and the top 10 things you do on a weekly basis that bring you the most happiness. How many of these cost some or any money?

In the documentary Playing with FIRE, a young couple, consumed by the idea of the American dream, lived in an expensive house by the beach, drove expensive cars, had expensive things, but were so stressed and tired they had no time to do the things they loved. They took a step back and did an exercise where they asked each other to write down 10 things that brought them the most joy.

They included things like:

• Hearing their baby laugh
• Having coffee together
• Baby cuddles
• Going for a walk
• Going for a bike ride
• Enjoying a glass of wine
• Good chocolate
• Talking to parents and family
• Family dinners
• Reading to their baby

When they really looked at that list, they realised none of those things:

• included going to the beach (which they pay a premium for)
• included the cars they spend so much of their working lives paying for
• were location-dependent (they could do those things anywhere)

Ultimately, they sold their house and moved somewhere cheaper and the documentary chronicles their experiences on their path to financial independence.

What’s on your list? 

Hedonic treadmill

The hedonic treadmill explains why when you buy something, the joy you experience from that item is short-lived explained further below.

Spending on experiences vs stuff

Ever bought a big ticket luxury item say, a new car? Or even something smaller like a new phone? Did it make you feel good? That’s because your brain detects these purchases as a positive change to your life and releases a hit of dopamine, the pleasure hormone. Then did you notice how your happiness with the new item is short-lived? This is because your brain reacclimatizes it’s baseline and the next time you buy a similar item, your brain expects to feel the same sensation but since you’re expectation has increased, you don’t feel the same level of pleasure. The same thing happens with drug users chasing their first high.

As time goes on, the longer you own the item, the less happiness it brings as you need to insure it and maintain it, and not get any additional hits of dopamine for it. The more stuff you own, the unhappier and more stressed you will be.

Experiences are different

Each experience is different, bringing a new high each time, and you create memories that you can look back on and re-experience that same high.

The more you spend on experiences like travel and learning new skills, the happier and more content you will be.

Fulfillment curve

The concept of the fulfillment curve is that once you have enough necessities for our survival, enough niceties for your comforts and pleasures and even enough little “luxuries” we have everything we need. Everything outside of that is excess and actually starts to weigh you down. Taking time, effort and cost to maintain. Having more than “enough” starts to diminish your sense of fulfilment from those items.

Lifestyle inflation

Lifestyle inflation refers to an increase in spending when your income goes up. Lifestyle inflation tends to become greater every time a you get a raise and can make it difficult to get out of debt, save for retirement, or meet other big-picture financial goals.

Being aware of this can help you to avoid falling subject to this.

The way you should look at increases in income is not what other material objects can I buy, a bigger house, a nicer car but instead how much TIME in my future can I buy if I invest this instead.

Personally, we are earning more than we ever have but our expenses have stayed about the same and it has enabled us to live the lifestyle mentioned in earlier posts.

Lifestyle is really well explained by these to graphs as detailed on this post

Average Joe increases his spending with every raise meaning his savings rate never really increases and essentially means that without state aid, will never be able to retire. Extraordinary Joe keeps his expenses the same regardless how much he earns, enabling him to save and grow his spare cash through investments, allowing him to reach retirement or even financial freedom MUCH sooner.

Creating a budget that is sustainable and increases happiness

So how do you use this knowledge to crate a sustainable budget that doesn’t decrease your happiness?

Different types of expenses

First, understand that there are different types of expenses:

1. Baseline expenses (mortgage/rent, groceries, utilities etc) – bring neither happiness nor unhappiness
2. Some baseline expenses decrease happiness like insurance or unexpected maintenance costs
3. Some spending increases happiness – where something new is brought into your life – either stuff or experiences. As we’ve seen, the hit of happiness from things is temporary but much longer-lasting for experiences.

Step 1: Know where your money is going

If you don’t know exactly how much you’re spending and on what you won’t be able to identify areas to best cut back.

There are lots of tools and tricks to help with tracking expenses but it doesn’t have to be laborious. Some people like to track daily but I like to do a retrospective once every 6 months or so. This can be as simple as extracting a CSV from all your bank accounts and credit cards (though some of these only go back 4 months online), compiling them all into one worksheet in excel and categorizing each expense into a set list of main categories and sub-categories (again you could find some samples online to get you started). Once you’ve done this you can use a pivot table to sum up all the categories to really see where your money went.

Some online tools have great visual reporting and budgeting techniques and guidance. I use YNAB (You Need a Budget), Pocketsmith is another one which allows auto-syncing from your bank and credit cards. Note though that syncing your bank with a third party tool exposes you to risk and waives your protections typically covered by the bank for fraud.

Step 2: Then look at the expenses that bring neither happiness or unhappiness

For example: your baseline costs (mortgage/rent, food, utilities, insurance). Cutting down on these costs will not impact your happiness one way or the other, though they will increase your savings rate and speed up your time to financial security.

The biggest expenses in most households are food, accommodation and transport – making up 50% of household expenditure according to the latest CSO household survey in 2015.

Step 3: Next cut costs that temporarily reduce happiness

The next items to look at will be things that reduce your quality of life a little but the beauty of the hedonic treadmill is that just as new purchases temporarily increase your happiness and your baseline expectation rises to expect the same high next time, it also reduces expectations when cutting out expenses and while you will feel a temporary decrease in happiness, your happiness level returns to the lower baseline and you will not experience prolonged decrease in happiness for having cut those expenses.

Things like cooking at home instead of eating out, or buying used things instead of new are good examples.

Step 4: Next TRY to find the expenses that you THINK cannot be cut without permanently affecting your own well-being.

Try cutting them out and if your happiness baseline does not adapt then do not cut those expenses. You won’t know unless you try. You do not need to cut these out completely but even reducing the frequency could make a big impact.

They could be things like:

• Buying lunch at work
• Eating out at restaurants
• Going out with friends
• Going to live sporting, music or theatre events

Step 5: Add back in some luxuries

After cutting expenses in the other steps, you should have freed up some extra money to budget in some splurges or “fun money”. As long as the amount is less than the amount you saved by cutting in the other areas, you will still have money left over to build towards financial security but also increased your happiness, even by spending less money!

You’ll actually find, after a bit of trial and error, that you can live on quite little and actually have increased happiness without the stress of money.

Other tips for justifying expenses

Using the 4% rule, for every 100€ that you continually spend, you will need 2,500€ invested to passively cover this cost. So if you’re looking to spend 100€ on something, ask yourself how long it takes you to save 2,500€ and that is how much time you are adding to your time to financial freedom.

Another way to justify if something is worth spending on, convert costs into the time you spent to pay for it. If you’re a single person earning a salary of 50k, without applying any non-standard tax credits you take home just shy of 37k or just over 3k/month. If you want to spend 2k on a holiday that means you will have spent almost 3 weeks of your life to pay for this. If this feels worth the time you’ve exchanged for it then it’s worth it but if not, it might help you to cut back further on expenses you would have otherwise thought nothing of spending on.

Another good example is a new car: If you buy one for 30,000€ and you take home 37k/year, you’re essentially working for an entire year of your life to pay for that car.

Concept of financial independence

If you’ve been a long time reader, you’re likely well aware of the concept of financial independence. But for those who may just be joining, I’ll give a quick overview. The definition can be different to each person but at the most extreme it’s the ability to invest enough money where the interest alone fully covers your annual expenses.

9 Stages of Wealth

Bout how do you become financially independent? Firstly, you’ll need to understand the different stages of wealth which can be broken down into the below:

Progressing to each stage gives you more and more options and freedom to take more risks with your life and career choices.

Basic Investment principles

Rule of 72

The rule of 72 is a calculation used to figure out how many years it will take for your investments (or debt) to double. You take the number 72 and divide by your interest rate. This will give you the number of years it will take for your investment or debt to double (without any additional contributions/payments).

So, for a credit card charging 21% interest it will take 3.4 years for your debt to double if you don’t make any payments against the principle

For an investment earning 10% it will take 7.2 years for your initial investment to double without additional contributions.

This is a basic guide to help you see the power of compounding, be if for you (investments) or against you (debt).

The 4% rule

If you’ve ever done retirement planning you may have come across the 4% rule. This is based on a study done at Trinity University in 1998 in an attempt to determine the safe withdrawal rate from a retirement portfolio containing assets which perform irregularly over time.

As you may have guessed, the study found that if you only withdraw 4% of your initial portfolio every year, you will be able to sustain your lifestyle for a very long period though of course depends on the performance of your portfolio and something called sequence of return risk.

In order to figure out how much you need in investments to cover your annual expenses you take your current annual expenses and multiply by 25. This can seem like a scary and unattainable number but I will show you how, if you can get your savings/investment rate to 50%, you can get there in about 15 years, even in Ireland without tax free savings accounts and high taxes on investments.

Why you’d want to stop working for money

I’m going to go into the psychology of money and happiness in another post but will dip into it a bit here

Maslow’s hierarchy of needs

Maslow’s hierarchy of needs is a motivational theory of human needs. It states that the needs on the lower levels must first be let before needs on the higher levels can be attended to.

These levels are depicted in the pyramid below:

While you can be touching on a lot of these at any one point, you will not fully progress to the next tier until all lower needs are met. So, if you are living pay check to pay check you cannot feel financially secure, your relationships may struggle or you will not be working to your fullest potential. Money stress results in divorce, health issues, lack of productivity at work and at home. If you don’t need money, you end up doing your best work and can focus on the important relationships in your life.

Now I’m going to paint a picture:

Imagine a life where:

• You no longer stress about money
• You have cash at hand to cover unexpected expenses
• You have cash at hand to pay for annual expenses in full
• You no longer live pay check to pay check
• You no longer feel trapped in a job you don’t love
• You can afford to take time off when stressed or ill
• You can afford to take extended breaks from work to travel, spend time with family and do the things you love most
• You have the freedom to work on projects or jobs that you are passionate about
• You have enough assets to ensure your family won’t need to worry about money if you get sick or pass away (without the need to illness or life insurance).

If you earn enough money to cover your base expenses and have even some money left over, you CAN achieve this lifestyle well before traditional retirement age.

I’d very much appreciate if you could subscribe to help get me towards YouTube’s minimum subscribers for monetization to help keep the content free and cover ongoing hosting and insurance costs.

You can check out my first video here (and for those who prefer to read/skim read, transcript below)

In this video, I go into a little about me, why I started this channel and why I’m qualified to talk about financial wellness and investments.

The channel will be dedicated to helping others see money differently and build a life you love. I hope to demonstrate sustainable ways to build towards financial security and how money can be a tool to help you build a life you love, not by buying material things but the most valuable assets of all – TIME!

If this sounds of interest to you, please subscribe and stay tuned for more videos on topics like, the psychology of money and recipe for human happiness, how to build a budget that is sustainable without reducing happiness and how to invest here in Ireland.

Now onto a bit about me.

About me

I’m a married mother of one in my mid-30s, originally from Canada. I first travelled to Ireland after college and met my now husband 1 month to the day after arriving back in 2005. We travelled around a while and then moved back to Canada until my husband got his citizenship and then returned to Ireland in 2014. Since then, I’ve been trying to navigate the various investment vehicles and their tax implications here. After thousands of hours of research, I wanted to share my newly acquired knowledge to help others navigate these options much more quickly than I had. And so the blog Mrs. Money Hacker was born in 2019. In early 2020, I start providing consultations and analysis to readers and although this made far more money than any passive income from the blog, this reduced the time I had to share my knowledge more widely and so this channel was born.

Disclaimer: I am not a qualified financial advisor or tax specialist. The views on this channel are my own and not to be taken as investment advice. All investments carry risk of loss and you should do your own research and due diligence before making any investments.

Why I’m qualified to talk about financial wellness

From the outside looking in, we probably don’t have the appearance of a successful family. But that all depends on your definition of success.

We don’t:

• Have nice new cars
• Live in a well-to-do neighbourhood
• Have a massive home
• Wear designer clothes

We DO:

• Drive an old but reliable 2005 toyota
• Live in a slightly undesirable but safe area within a 20 minute walk to the city center and within 20 minute commute of work, requiring only 1 car
• Have a comfortable sized, relatively energy efficient house, decorated to our taste

By living a fairly traditional life working average jobs with standard career progression we have:

• Lived and worked in 3 continents
• Travelled to at least 40 cities in 21 countries in 4 continents
  • USA (LA, New York, Las Vegas)
  • Fiji (Nandi, Waidroka)
  • New Zealand (Auckland)
  • Australia (Melbourne, Syndey, Cairns/East Coast)
  • Hong Kong
  • Singapore
  • Malaysia (Kuala Lumpur)
  • Thailand (Bangkok, Phuket)
  • Vietnam (Hanoi, Ha Long Bay)
  • London, UK
  • China (Guangzhou)
  • Philippines (Manila)
  • India (Delhi)
  • Spain (Malaga)
  • Portugal (Portimao, Albefeura, Lisbon)
  • Italy (Rome, Venice)
  • Greece (Santorini, Athens)
  • Croatia (Split, Dubrovnik)
  • Canada (Vancouver, Winnipeg, Montreal, Ottawa, Toronto, Alberta, Nova Scotia)
  • Cuba
  • Ireland (Dublin, Cork, Galway, Limerick, Waterford etc)
  • Tenerife
• Paid 20% down on 2 properties
• Paid cash for our (old) cars
• Paid cash for our wedding and honeymoon cruise
• Pay all our annual expenses in full
• Took a major gamble and left good-paying jobs and decent lifestyle to move back to Ireland, where I had to go 8 months between pay checks for my visa to come through and allow me to get work
• I was able to take 18 months maternity leave unpaid without going into debt
• Husband took 6 months statutory parental leave unpaid
• During maternity leave we: spent a week in Tenerife, 7 weeks in Canada, and 2 months in Portugal (pre-lockdown)
• Gone down to one part time income so my husband can be a stay-at-home dad and I still have time to work on my passion projects, and still able to save a large portion of our income

Even with all this time between jobs we are:

• On track to clear our mortgage in the next 2-3 years
• On track to no longer need to work for money where the interested from our passive income from investments covers our expenses in 12 years (or less if my husband goes back to work once our son is in school)

Our expenses in the last 2 years have averaged 41,000€ including all travel, new baby costs, house maintenance, a family wedding and 50^th birthday, investment property costs, work/blog related expenses etc.

We recently sold our Canadian property and will be paying down a large portion of our mortgage and will no longer have the investment-related costs for this property. This should bring our expenses down to about 30,000€ in the next 12 months!

Why I’m qualified to talk about investments

In addition to living beneath our means for most of our working life, through extensive research we’ve figured out how to do all of the following mostly without any outside help:

• Navigate settling into 2 new countries and obtaining work there
• Apply for and obtain Canadian citizenship
• Apply for and obtain permanent residence in Ireland
• Bought a house in Canada and Ireland
• Sold a house in Canada while non-resident living in Ireland
• File taxes in Canada and Ireland including more complex returns like non-residence rental income, sale of a property from another country and as a sole trader company with separate investment income to report in Ireland
• Opened and subsequently closed a limited company in Ireland
• Setup a blog which has grown up to 5,000 pageviews a month by 1,600 unique visitors from all over the world
• Transferred my retirement account from a managed to self-directed investment vehicle in Canada
• Opened a self-directed investment account in Ireland and started investing

Anyone who has been through these processes can attest to the level of effort required to get started or get the documentation and analysis just right in order to succeed. And it’s these same skills I use when researching how to invest and build wealth here in Ireland

Onto my day job then.

While I’m not a qualified financial advisor, my day job is as a business analyst.

For those who don’t know what this is- At a high level:

• I use detailed analysis to research and document business cases to highlight which projects are most profitable for a company to pursue,
• I review and identify processes that can be changed to introduce greater efficiencies and
• I support software development projects through the entire lifecycle to translate what the business wants into detailed specifications that developers and testers can follow to develop software.

The same skills I use in my day job, are used in my personal life when researching anything new that I do including learning to invest and build wealth here in Ireland which I hope to pass onto you!