Yes, but not in the ways that most people think. When someone experiences a liquidity event, it is often accompanied with visions of a new home, new car, redecorating the house, a new pool in the backyard, or paying off debt. Whether it’s an entrepreneur or inner-city athlete signing his first NFL contract, there is usually a spending spree to satisfy the decades of wants that have gone unsatisfied. The pent-up demand from the lean years is over, and you are finally able to afford all the things you want for you and your family. There is no doubt that money makes life easier; the question is are you happier?
In a 2010 study of 450,000 Americans, Daniel Kahneman, author of Thinking Fast and Slow (my favorite book on behavioral psychology), found that money does buy happiness but only up to a point. He studied people with similar life experiences, like divorced parents, and found that once their income moved beyond $75,000 per year, the happiness level as a result of money did not improve. So someone with the same circumstance earning $1 million per year was no more or less happy than someone earning $100,000 per year. Once the basic needs were satisfied, happiness levels were more dependent on personality and life circumstances – not money.
Interestingly how we spend our money also has a big influence on our overall happiness level. Money spent on experiences, education, family vacations and even psychotherapy led to higher happiness levels than buying a new car. Whenever we purchase a product we get get a quick blast of dopamine that makes us feel good, but it ends as quickly as the new car smell dissipates. The only way to get the feeling back is to buy something else. To test the long-term effect of a product purchase on your life, imagine the best thing you ever bought. Can you remember the day you bought it? Who was around you when you got it? What was the weather like on that day? If you can’t recreate the mental picture in your head, don’t worry you’re not alone. Most people can’t.
If you change the question from a product to an experience, the outcome changes. Can you remember your childhood family vacation to a national park or the first baseball game you went to with your dad? I still remember one of my favorite client experiences from ten years ago, and I was not even there. For his retirement party, he took his entire family including spouses and grandchildren to the south of Spain for 2 weeks. They rented a house on the water and enjoyed an absolutely magical experience. Experiences don’t have a shelf life.
Having worked with hundreds of clients over the years, the happiest and most content have enough cash flow to cover their basic needs, they don’t have debt, they are cautious before buying new things, and they are carefree when it comes to their experiences (as long as they can afford it). We built our entire financial planning process around this idea. Our Blue Pages app is designed to ensure that your lifestyle cash flow is available to buy the things that make you happy – forever.