When Less Is More

The other day, I received a newsletter with a story that some of you may have read before:

An American tourist was at the pier of a small coastal Mexican village when a small boat with just one fisherman docked.

Inside the small boat were several large yellowfin tuna. The tourist complimented the Mexican on the quality of his fish and asked how long it took to catch them.

The Mexican replied, "Only a little while."

The tourist then asked, "Why didn't you stay out longer and catch more fish?"

The Mexican said, "With this I have more than enough to support my family's needs."

The tourist then asked, "But what do you do with the rest of your time?"

The Mexican fisherman said, "I sleep late, fish a little, play with my children, take siesta with my wife, Maria, stroll into the village each evening where I sip wine and play guitar with my amigos, I have a full and busy life."

The tourist scoffed, " I can help you. You should spend more time fishing; and with the proceeds, buy a bigger boat: With the proceeds from the bigger boat you could buy several boats. Eventually you would have a fleet of fishing boats. Instead of selling your catch to a middleman you would sell directly to the processor; eventually opening your own cannery. You would control the product, processing and distribution. You could leave this small coastal fishing village and move to Mexico City, then Los Angeles and eventually New York where you could run your ever-expanding enterprise."

The Mexican fisherman asked, "But, how long will this all take?"

The tourist replied, "15 to 20 years."

"But what then?" asked the Mexican.

The tourist laughed and said, "That's the best part. When the time is right you would sell your company stock to the public and become very rich, you would make millions."

"Millions?...Then what?"

The American said, "Then you would retire. Move to a small coastal fishing village where you would sleep late, fish a little, play with your kids, take siesta with your wife, stroll to the village in the evenings where you could sip wine and play your guitar with your amigos."

I found it to be a reminder that sometimes we have our priorities mixed up. If our goal (whether conscious or not) is to make more money to be able to afford a better lifestyle, we shouldn't forget what we're giving up in order to get there.

The Pursuit of Happiness: Experts' Own Advice

Wow, it's been nearly a month since I last posted. Things had been very hectic at work, but hopefully it's slowing down now.

In today's Wall Street Journal, Jonathan Clements wrote about six academics in the field of "happiness research" who took some of their own advice and made changes for the better:

• Relish the day. The problem is that when we get a raise or promotion, we're thrilled at first, but quickly get used to it. UCSD professor David Schadke's advice is to celebrate the small things, not just save up the celebrations for big occasions. Also, take photos and buy souvenirs to help you to recall the good times long after a vacation or event is over. For example, when his undergrad school, the University of Texas, won the college football championship last year, he bought T-shirts to help him remember.


• Dodging traffic. Studies have shown that commuting is one of our least favorite activities and one of the main reasons is the lack of predictability. This lack of control is what induces the stress. Warwick University professor Andrew Oswald too his own advice and moved closer to his office, reducing his commute from 60 minutes to 20 minutes.


• Seeing friends. Chances are you enjoy seeing friends and family more than you enjoy spending extra time at the office. So why do we take the higher-paying job that leaves less time with our loved ones? Part of the answer is that we sometimes don't thing about how things will play out over time. We'll get used to the extra money fairly quickly, but we don't realize the long-term effects on our social lives. Professor Richard Easterlin from USC used to sacrifice family time for research time, but does that much less now and enjoys the extra time with his family.


• Buying memories. Alan Krueger from Princeton suggests that we may be able to boost our happiness by thinking carefully about how we spend our time. To that end, he suggests "buying memories." For example, he cites taking his dad to the 2001 Superbowl. Even though his Giants lost, he enjoyed the anticipation of the game and the event itself. He even framed his ticket to remind himself of the event.


• Limiting options. Clements writes about a study by Jane Ebert and Daniel Gilbert where participants were told that they can take home an art poster. Some were told they could exchange it if they didn't like it, others were told that their selection was final. Which participants were happier? The ones that didn't have the option to exchange it. Gilbert says "When options are open, the mind generates debate. When options are closed, the mind generates satisfaction." To that end, Gilbert took his own advice and proposed to his girlfriend, who is now his wife. He says that "sure enough, now that she's my wife, I'm happier."

A Free House Can Be Too Expensive

A recent post at PFAdvice on 10 Hidden Costs People Fail to Consider reminded me of the dangers of determining affordability of a home by just focusing on the mortgage payments which have been faciliated by easy credit, low interest rates, and "innovations" like interest-only mortgages. Even if a house is affordable--that is, the bank says it will lend you the money--doesn't mean that it's not too expensive for you. In addition to costs like maintenance, there's also the cost of furnishing, upkeep, etc. which tend to go up with the price of the home. Often overlooked, there's also the additional cost of ratcheting up our lifestyle.

An extreme example of this is a family who won a gigantic, well-equipped, house, plus $250,000 and a big SUV, in the HGTV Dream Home Sweepstakes. An article in Money magazine describes the 6,000 square foot house:

Each feature seemed more fantastic than the one before: the massive great room with its 30-foot ceilings and six-foot-wide fireplace; the master bedroom suite--in effect, a separate cottage connected to the main house by a breezeway, replete with a hot tub; the indoor elevator and the outdoor pool and fireplace; the guest house by the lake...The house is really three structures: a main building, a separate master bedroom suite and a lakefront guest cottage. Some 550 tons of limestone went into the construction of the main house, much of it used to build the 30-foot fireplace in the great room. Ten cedar trees were used to support the beamed ceiling, the trunks shaved down to square posts around the perimeter. Six sets of glass french doors let in sweeping views of the yard and lake.

You get the picture. The problem is that even though they were given the house and $250,000, they still can't afford it.

Upkeep is $2,900 a month. Homeowners insurance runs $7,000 annually. The insurance and gas bill on the Cruz fleet (they own seven vehicles, including the SUV they won in the contest) costs $1,000 a month...Then there are the incidentals. Fixing up the family boat, which got little use in Illinois, cost $11,000. A dog run for their three dogs was $6,000. Between family and friends eager to see the Dream Home, the Cruzes have company nearly every weekend. The tab: about $1,000 a pop. They've donated $40,000 to charity. And then there have been the splurges--$5,000 on Christmas presents; $2,000 for scuba lessons; an $1,800 go-kart.

So now, after a year in the big house, they're down to $36,000 and have put the home on the market. This example may be extreme, but it does remind us that we also have to factor in the associated costs (like upkeep, maintenance, etc.) AND the other costs that are rarely factored into the equation: lifestyle costs. Call it the "keeping up with the Jones'" factor.

We tend to judge our standard of living in comparison with our peers (such as our neighbors). If we move into a neighborhood that we can barely afford we're going to subconsciously feel the need to spend even more to have the same type of vacations as our neighbors or drive the same types of cars. The end result: we're either less happy or have less money, or both. If we don't factor in all of these costs, even a free house can be too expensive.

Clements' Nine Tips for Investing in Happiness

Jonathan Clements at the Wall Street Journal on Sunday pointed out that academic studies suggest that having more stuff doesn't equate to a permanent increase in happiness (while we may get a temporary boost from acquiring something new, the boost generally doesn't last). Based on his review of some studies, he suggests the following nine tips for investing in happiness:

1. Make time for friends. According to a 2006 report by the Pew Research Center in Washington, 43% of married people say they are "very happy," versus 24% for those who aren't. Seeing good friends regularly can also increase happiness.


2. Foget the pay raise. "Soon enough, you are taking the extra money for granted and you're feeling dissatisfied again. Experts refer to this as 'hedonic adaptation' or the 'hedonic treadmill.'" Now, I don't think he means that you should turn down any pay raises you're offered, just that you shouldn't focus on the extra money as a source of happiness.


3. Don't trade up. If you move to a neighborhood where those around you are wealthier than you, you'll be reminded of your relative financial standing. Being around those who have more makes us less happy with what we have.


4. Keep your commute short. In addition to being unpleasureable, a long commute can also be unpredictable, making it harder to adapt to the hardship. It also gives us less time for leisure.


5. Count your blessings. "Instead of obsessing over your neighbors' riches, try focusing on the riches you have -- and that will likely make you feel happier."


6. Enjoy a good meal. Eating a good meal is one of those activities that brings us pleasure.


7. Challenge yourself. Be more active, maybe starting an exercise routine, instead of vegging in front of the TV.


8. Volunteer. Not only does volunteering make you feel good, it also helps to be around others who do good.


9. Give it time. Surveys have shown that we tend to get unhappier as we approach our 40's but then rebound from there.

I think these tips for investing in happiness can have just as much of an impact on whether we have enough than tips on investing in stocks, bonds, etc. Since in some sense what we really want out of money is the happiness it gives us, by being happier without spending more, we increase our wealth.

Income Irony

One thing I'm struck by is that making more doesn't necessarily mean you're Getting To Enough more quickly. The problem is that as we make more, we spend more and quickly get used to that new level of spending. This increasingly raises the amount that we "need" in order to support our lifestyle, which raises the amount that we need to have saved up in order to support that lifestyle when we no longer have our main source of income (usually our salary). In this case, compounding works against us.

Jean Chatzky comments on this in her Money Tip of the Day. Her suggestions on how to keep spending in check are to monitor it (by using something like Quicken) and to have goals. As she puts it, "the easiest way to say no to that new pair of shoes is to know that you need the money for next month's vacation in Florida or next year's tuition bills."