As my careers teacher at school once told our class “Money on its own will not make you happy; but the lack of it can make you miserable.” And he was absolutely right.
Most people, not unreasonably, make the assumption that the more money you have then the more content you will be with life; however it’s not as simple as that. Perhaps surprisingly there is no perfect correlation between the amount of money people earn and their level of happiness. There are many people who earn significant amounts of money but live quite an extravagant lifestyle that consumes much of their income. Whilst it may bring them a large degree of short-term pleasure it may not help with longer-term happiness.
So how do we achieve financial well-being? The secret appears to lie in doing some simple things that may not appear to make ‘financial good sense’. I come across many people who have been told by their financial advisers that when mortgage rates are low then borrowing more money makes sense because it’s ‘cheap money’.
Whilst it might make financial sense it doesn’t necessarily make psychological sense to burden yourself with debt even if interest rates are low. Whenever I talk to people who have recently paid off their mortgage I get a genuine sense of their increased well-being in knowing that they now own their own home.
Much the same can be said about people who have made safer but less exciting financial investments. In a world where the traditional pension scheme seems to be perceived as a very pedestrian investment, which is unlikely to make anyone wealthy in retirement, there is a danger in assuming that more exciting (but inevitably riskier) investments are a much better idea.
Many people have invested in buy to let or holiday rental properties only to find that they have over extended themselves and been left with an asset that has depreciated rather than increased in value.
Most financial advisers conduct assessments with their clients on the individuals’ ‘appetite for risk’ and based on their clients’ answers they invest in either safe funds with low returns or risky funds with higher returns.
Even more worryingly recent studies suggest that many financial experts’ performances in picking the right funds are no better than chance; but at least with a safer fund you are still left with the capital even if the fund performs poorly and makes you relatively little interest.
But perhaps we can learn more about financial well-being from a real financial expert. Warren Buffett, perennially ranked among the world’s richest men, lives a lifestyle that hasn’t changed much since before he made his billions. He is often referred to as the world’s greatest investor, and his long-term track record suggests the title is well deserved. He is also legendary for his frugal lifestyle, residing in the same house in Omaha, Nebraska, that he bought in 1958 for $31,500. He is well known for his simple tastes, including McDonald’s hamburgers and cherry Coke, and his disdain for technology, including mobile phones, computers and luxury cars. Despite a net worth measured in billions, Warren Buffett earns a base salary of $100,000 a year it’s a salary that has not changed in 25 years. A man of simple tastes, Buffett easily supports his modest standard of living with this salary.
Financial well-being is ultimately about having a comfortable lifestyle that we can afford and a degree of financial security in the knowledge that if life becomes difficult we can ride out the storm. Live below your means and invest the surplus wisely.
Tips for financial well-being (not for getting rich quick!):
Don’t incur large amounts of debt that might be difficult to repay if life changes
Don’t spend large sums of money on depreciating assets e.g. cars
Don’t buy things on credit – if you can’t afford something save up for it or buy it second hand
Don’t put all your eggs in one basket – if you are going to have some investments that are riskier spread the risk evenly with very safe investments
Don’t just live for today plan for the future; it’s never too soon to plan for your retirement
Don’t have all your money tied up in assets – although having too much in cash will earn you very little interest and the capital will ultimately depreciate, having a modest cash reserve gives people a degree of comfort for the ‘rainy day’
As Warren Buffet once said “Predicting rain doesn’t count, building arks does.”