happy man with small puppy at pool

This blog is loosely about the best way to spend your time and money. 

That is a pretty loaded statement, so let me break it down a bit.  By best way to spend your time and money, I mean the way that will maximize your happiness.  Because that is what time and money are for, right?  They are a means to an end (Money, you’re such a tool!).  They are not valuable in and of themselves; they are valuable based on how you spend them, or to put it another way, they are valuable for their potential to be spent.  Even though I denominate everything in dollars here, time needs to be included in this equation too because there is an inevitable tradeoff between time and money.  Acquiring more money requires more of your time, and having more time requires more of your money.  So what kind of balance should you strike between time and money activities to maximize your happiness (aka utility in econ-speak)?

All of my ROI analyses are calculated in dollars because I use money as a proxy for happiness.  It isn’t a perfect proxy for happiness but generally, the more you have of it the happier you are, up to a certain point depending on how you measure happiness.  The same could be said about time, but the advantage of using money versus happiness or time units is that money is much easier to quantify.  So don’t go telling all your friends that Flannel Guy ROI is a shallow, money-obsessed dude.  I’m just trying to optimize my life.  I mean, I am fully behind the Jonathan Swift quote that “a wise man should have money in his head, but not in his heart.”  Just want to make that clear.

So over the course of a lifetime you will have spent a fixed amount of money and time.  How can you best allocate your blocks of time and money to maximize happiness?  I’m going to draw on happiness research from various sources to answer that question.  The first place we will start is with needs.  These are your essentials, the bare minimum you need to live a fulfilling life.  Next we will look specifically at the best ways to spend your time, and then we will look at the best ways to spend your money.  And finally, I will tell you how I am planning to use this information in my own life.  But first, since this is a long post, I’m going to summarize everything in a quick executive summary, with bullet points, subheadings and all!

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Intentional spending for happiness, an executive summary

Top Priorities:

Fulfill your fundamental human needs including shelter, food, work, relationships, security, health, community, leisure, creation, self-identity, and freedom.

Second Tier Priorities:

Friends, family, and community.  We are social animals, and nothing makes us happier than spending time with people we love and people who love us.  Invest time and money in these valuable relationships.  Put these people above the nice dinners, exotic vacations, and new cell phones.

Health.  If you don’t have your health, you don’t have much.  Invest in your physical, emotional, and psychological well-being.  Nothing takes a toll on happiness like crappy health.  Exercise, eat well, meditate, work on your self-esteem.  These activities will make you happier and extend your life.

Best Practices:

  • Spend on experiences, not things.
  • Spend less (under-indulge to savor your indulgences more).
  • Spend on other people instead of yourself.
  • Don’t get obsessed with money or happiness, it will make you pretty miserable actually.

1. Fundamental human needs

Research done by Chilean economist Manfred Max-Neef identified 9 fundamental human needs that are essential to well-being and consistent across cultures and time:

  1. subsistence –  food, shelter, clothes, health, work
  2. protection – security, mitigation of risk (insurance for example), investments
  3. affection – strong relationships (family, friends, romance, nature)
  4. understanding – education, knowledge, critical capacity
  5. participation – community, work, volunteering
  6. leisure – free time
  7. creation – curiosity, imagination
  8. identity – self-esteem, values, religion, customs, groups, respect
  9. freedom – autonomy, rights

Not all of these needs are fully within your circle of control, but at least part of each one is.  Allocating your time and money to make sure as many of your fundamental needs are met as possible would look something like this:

Find a stable source of food, shelter, and income.  Minimize life risks by living in a safe environment, finding safe work, holding basic insurance policies, and doing the kinds of things that would lower your life insurance premiums.  Establish an emergency fund and invest money for your future.  Be healthy: eat well, exercise, minimize bad habits.  Invest in close relationships.  Stay curious and continue to learn.  Participate and socialize in groups, develop community ties.  Set aside leisure time for yourself to pursue passions, guilty pleasures, or simply to recharge.  Cultivate a strong sense of self, what you value, who you are, and how you define yourself.  And finally, put yourself in situations and environments that maximize your autonomy and respect your rights as an individual.

Easy right?  Not so much, but these are the foundations of a fulfilling life- your fundamental needs as a human being.  These are the things that social scientists say you should spend your time and money on first before you try anything too fancy.  The great thing about a lot of these fundamental needs is that they build on each other.  There are synergies here, and once you start building momentum in one area, the other needs become easier to achieve.

2. How to spend your time

“We are happy when we have family, we are happy when we have friends and almost all the other things we think make us happy are actually just ways of getting more family and friends.” – Daniel Gilbert

“It is only a slight exaggeration to say that happiness is the experience of spending time with people you love and who love you.” – Daniel Kahneman

Before I get into all the details of happiness research and implications for using your time wisely, the meat of almost all happiness research is summarized by the two quotes above.  The rest is just seasoning, although your health is really important too.

So I’ll go ahead and define happiness as minimizing pain and maximizing pleasure.  An interesting study was described in the Nobel Prize-winning psychologist/economist Daniel Kahneman’s book called Thinking Fast and Slow.  Basically the study asked people to evaluate other’s lives based on their levels of happiness over time.  You would think that someone with a pretty consistently happy life would be evaluated better than someone with a neutral life that had a short-lived but major spike in happiness (winning a Nobel Prize for example), but people overwhelmingly evaluated the one-time happiness event person as having lived a better life.

Similar to how James Murphy says he wouldn’t trade one “stupid” decision for another five years of life, the message is that the highs in life, regardless of their duration, shape your life evaluation.  This is a little antithetical to early retirement philosophy, but it is also important to note that life evaluations are always done in hindsight, and happiness expert Daniel Gilbert will tell you that hindsight is not a reliable predictor of future happiness.

But there is still something valuable to learn here.  You live in both the present and past.  So maybe sacrificing a year of your career to do something really amazing like climb Mt. Everest or tour the world might be worth the pain of having to work an extra year or two to make it up, because you can always draw on that memory as a source of happiness and positive life evaluation in the future.  But sacrificing your entire life savings to do something gargantuan might be selling your present-tense self a little short.

Moving on to another source, the World Happiness Report, we’ll take a look at some of the biggest determinants of happiness.  In the spirit of avoiding pain, you should definitely invest time in finding the right life partner and in keeping that relationship strong because the pain of a divorce is the number one determinant of wellbeing (present tense) in this study (table 3.1 in report).  After that, the mid-tier positive factors contributing to wellbeing are social support, macroeconomic conditions, and health.  You can’t really control much in the macro economy, but you can definitely invest in your health (exercise, diet, meditation, mental health, self-esteem) and social support network (family, friends, community).

Looking at things a little bit differently from a life evaluation perspective, the report finds that the top two factors influencing happiness are your current health and previous malaise in your teenage years.  So again, invest in your health, especially mental health, and parents, don’t discount the trials and tribulations of your teenage children, as melodramatic as they may seem.

Regarding your career, you shouldn’t waste too much time and energy trying to climb the corporate ladder.  The World Happiness Report also says that “individuals who put a high premium on higher incomes generally are less happy and more vulnerable to other psychological ills than individuals who do not crave higher incomes… a person considering high income essential would need twice as much income to be as happy as someone considering high income unimportant.”  And, “gains in income have to be of equal proportions to household income to have the same benefit in units of life satisfaction.”  So a $10,000 dollar raise for someone making $100,000 per year is worth twice as much happiness to a person making $50,000.  The general message is don’t get obsessed with money, and the more money you have, the harder it is to raise your happiness with additional money (classic econ concept of diminishing marginal returns).

Other anecdotal research indicates that you are happier when your mind is focused and when you are busy.  “Relaxing” in front of the TV, while it might be the easiest choice at that moment, is a bad time investment.  Stay busy, stay active, and don’t let you mind wander too much.  And finally, other happiness research says that chasing happiness can actually make you less happy, so focus instead on the activities and behaviors that drive happiness, not happiness itself.

3. How to spend your money

Now that you have taken care of all your fundamental human needs, what is the best way to spend those hard-earned dollars to maximize utility?  A lifetime supply of ice cream?  Probably not, and I’ll explain why.  As info, most of this information comes from the New York Times Op-Ed by Elizabeth Dunn and Michael Norton, authors of Happy Money: The Science of Smarter Spending.  The Frugal Model also has a nice summary at her site.

Principle #1: If you are going to spend money on yourself, spend it on experiences, not things.  Experiences are mental annuities.  You can draw on those memories forever.  Buying a nicer TV or new car won’t provide the same lasting happiness as a vacation, special night out, or otherwise novel experience.  Also, memories appreciate with time, meaning you sort of rewrite your memories to make them seem better than they actually were as you get older, versus things, which just depreciate with time.  Finally, nobody can take your memories and experiences away from you.  You can’t lose them, and they can’t get hacked or stolen.  They are yours forever.

Principle #2: Don’t indulge (spend less).  Having more of something that you love might cause you to enjoy that thing less in the future.  Again, classic diminishing marginal utility here, but Dunn and Norton imply that you should stop indulging earlier than economics might suggest.  Limit and delay gratification a little bit more and the reward will be that much better.  Daniel Gilbert, quoted above, also talks about delayed gratification, but he frames it as the pleasure of looking forward to things.  For example, everyone loves going on vacation, but you get almost as much happiness from looking forward to your vacation as you do from going on it.  Which is why I like to plan a lot more long-weekend type vacations versus one-and-done extended trips.  You have a lot more things to look forward to and you don’t end up over-indulging.  Another best practice here is to expand the number of things you love, that way you don’t overdo it with any one specific indulgence.

Principle #3: Spend on other people.  Even toddlers known for being selfish (“mine!”) show greater levels of happiness from spending money on others rather than themselves.  The same holds true for adults as well.  Having not read the book, I can’t say, but I wonder how much of this happiness is derived from the pro-social effects of spending on others versus the general self-esteem boost of doing something good.  Whatever the answer, if you want to spend your money in a really effective way to help other people, you should check out GiveWellThe Life You Can Save, and/or The Bill & Melinda Gates Foundation.  And if you think the boost is more pro-social, make sure to give to people that have less money because it will mean more to them and also maybe specify that they shouldn’t spend it on “things.”

How I plan to start spending for happiness

The easiest win here is cutting down my spending, particularly on “things.”  Right?  Because things don’t add a lot of value outside of having your needs met and maybe enabling you to do more activities with family and friends.  You need furniture, a place to live, a way to get to work, a computer, etc.  But this really makes it clear that I shouldn’t be spending money on things that aren’t absolutely necessary or likely to add lasting value to my life.

Next, I want to make sure I am prioritizing my health and the important relationships in my life.  This means exercise, modest vacations, more frequent visits and traveling as necessary, family outings, happy hours, dinner parties, etc.  Saving for the future is important, but I need to invest in current happiness first.  I have mentioned this before.  I am talking about happiness smoothing (consumption smoothing).

If you are saving so much that you neglect your health and/or important relationships, you are in a risky situation.  Firstly, even though you are investing in your financial future, you aren’t investing in your emotional or physical future.  What kind of memories will you have to look back on?  Secondly, who knows what your future will look like… maybe your retirement accounts get hacked or maybe you or your loved ones are involved in a major accident.  Hedging against these horrible scenarios isn’t that expensive, and, at least for me, is a priority over getting to financial independence a few years early.

All other money will be budgeted for in the retirement accounts.  Simple as that, although I will make a little room for one or two of those once-in-a-lifetime experiences to increase my life-evaluation, but mostly as a reward for hitting major goal milestones.  Of course when I do hit financial independence, the plan is to have those kinds of experiences more often.

So that’s it.  If you made it this far, thanks for reading… I hope it was worth it!

Spend well-

FG ROI

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About The Author

James Flannel Guy ROI's picture

Portland, Oregon-based Flannel Guy ROI is a working dude and family man that likes flannel shirts and wants to achieve financial independence a little sooner than most, particularly by making smart spending decisions and living intentionally. 

His overall idea is to look at spending decisions as investments: what decisions will return the most value to you over time? 

Each scenario is evaluated over a 10-year horizon with the following summary statistics:

Present value – what is the total value of your investment and expected returns in today’s dollars?
Return on investment (ROI) – how much of your original investment will you make back?
Payback period – how long will it take you to recoup your original investment?

Learn more at www.flannelguyroi.com

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