About Happiness and Money

Let me ask you a question. How much of what you spend every month is essential?

Think about this for a minute.

If it came to pure survival – primal, bare-bones, get-to-see-another-day survival –  you’d need very little. Water, food and a roof over your head. I’d even dispute that last one, as you could possibly live in a cave for a while if you really, really had to.

Of course, the point here isn’t about surviving – or not dying. That would lead to very boring, sad and short lives!

Secondary Expenses Bring Happiness

We are complex creatures. We have developed needs that other animals don’t share.We need to feel safe, have fun, be healthy, have a social life, and feel appreciated and loved.

If we consider primary expenses the bare minimum to survive, then secondary expenses are those that add a lot of value to our lives and make our lives whole.

Let’s consider housing expenses as they  are probably your biggest expense. You could live in a tiny, smelly and cold flat in a rough suburb outside your city. I mean, you wouldn’t die. Hopefully. How much could that cost in rent? $300 per month?

Now think about what you’d need from your home in order to feel happy and complete as a human being. A spacious flat with plenty of natural light, in a safe area and with easy access to shops and activities? Or maybe a bigger house in the countryside, surrounded by nature and with only the sound of the wind to hear at night?

This place would fulfil the role of a home to you. You’d know that this was enough.

This wouldn’t have to be very fancy or expensive. Maybe $800 per month (depending on where you live that may be a lot or very little, but you get the point). The $500 difference going from the horrible little flat at $300 to the much nicer, yet not perfect house at $800 would be considered your secondary expense.

 

 

The difference would be massive, though. You’d feel safe at night, you’d wake up relaxed in the morning and your life would be much better for it. I mean, just look at that view!

With secondary spending, you’re getting great bang for your buck in terms of added personal value.  The extra money is definitely worth it, and help the various aspects of your life that contribute to happiness.

Tertiary Expenses – Trim The Fat

The key here is being able to differentiate between enough and plenty.

Tertiary expenses are the excess. They are the fat that needs to be trimmed. They are expenses that do not add much value if any at all. You could spend an infinite amount of money on anything, but after it meets all your criteria and fulfils its purpose, it’s just an unnecessary cost.

If instead of 2 rooms you got a place with 7 rooms you’d get more space for your stuff. Instead of a small, cosy and functional garden, you got a large one with a swimming pool, a barbeque and a tennis court. You know, in case the kids and the dog want to run around once in a while…

But how much more would you be paying for the bigger and better house? The price could easily double by upgrading a few other bits…but would the changes really make you happier?

Well, yes, they probably would, but only slightly. After the optimum level of spending – or secondary spending – anything else you spend comes with diminishing returns.

In other words, it takes a lot more money to increase your happiness by only a bit. The increase in quality of life you got going from the flat to the house cost you $500. To get that same increase you may have to spend $5,000 more…

In fact, if you went far enough, I’d go as far as saying that your happiness would actually decrease.  Bigger houses come with more space to clean, more things to go wrong and more reasons to cause a headache.

You could go a few steps further still, and upgrade to something ridiculous like this:

At this point – after the initial rush wore out – you’d be left with a stupidly luxurious house with enough space to accommodate three families which would require a lot more than $800 per month…

How about $8,000 per month? That’s $7,200 extra spent on something that isn’t making your life much better. Of course, this is an extreme case, but you can find tertiary expenses in most people’s bank statements. Anything that doesn’t affect your happiness – or factors that directly contribute to it – is effectively a waste, and should be trimmed if you wish to reach financial independence.

How To Spend To Maximise Happiness

If you feel that you’re guilty of some cheeky tertiary spending – and let’s be honest, we all are – I have the perfect remedy for you. This is the method I follow to distinguish secondary spending that really makes me happy from the excess.

1. Track your expenses over a few months so you get a clear view of where your money is going.
2. Rank your expenses by amount – from largest to smallest. Obviously, the larger costs have the biggest impact on your finances.
3. Starting from the top, think about what effect spending less in that category would have on your quality of life and happiness. Give it a “+” if it would improve it, “-” if it would worsen it or a “=” if there wouldn’t be much difference. Be generous and give downgrading a go – you can always go back to what you’re doing now.
4. Once you’ve done this with all your expenses, look for cheaper alternatives and apply them.
5. Keep this up for 2 or 3 months, and then assess what worked and what didn’t work.

Try this process and you’ll find ways to lower your expenses that you didn’t know you’d be capable of doing – that’s what happened the first time I did it, and I’m sure you’ll be glad you tried it as well. You’ll probably get used to the changes quicker than you think due to Hedonic adaptation. Once you enjoy the extra money you’re able to save every month, you’ll never want to go back!

Have you even tried a similar exercise to reduce your expenses? How did it go? Let me know in the comments below!