Ian Thomas, Pilot Fiancial Planning
'How to Spend It'
In my view, life planning with no sense of financial reality, or financial advice with no link to your personal dreams and aspirations are both equally meaningless. Proper financial planning makes the connection and attempts to answer one fundamental question: ‘how much is enough?’
The more technical aspects of investment strategy (e.g. pension law or taxation) are of course the ‘bread and butter’ of my job. But effective wealth management is only one side of the equation. What about the other, equally important, aspect of financial planning: how you spend your money once you have it?
If you don’t devote at least some time to thinking about your spending habits, how can you be sure that you’re not wasting a huge amount of money on things that don’t really improve your life?
Beyond a fairly modest threshold, studies repeatedly show that increased income and material wealth have no measurable effect on your happiness. Not only that, but taking out a bigger mortgage, commuting further to secure a higher-paid job or working longer hours in order to fund a ‘dream lifestyle’ can even reduce your happiness, health and general well-being.
So, how could you go about adjusting your spending to maximize your contentment with life, regardless of your level of income? A new book ‘Happy Money: The New Science of Smarter Spending’ contains some useful guidance. The authors propose five key principles which could help you get the highest happiness ‘bang for your buck’:
1. Buy experiences – spending money on alluring material goods provides an initial buzz, which soon dissipates. In contrast, experiential purchases tend to increase in value as time passes. We look back fondly on past family holidays or a reunion dinner with friends and gain pleasure from recounting stories of our road trip across the United States.
2. Make it a treat – from chocolate to expensive cars, once a luxury becomes too commonplace – part of our everyday lives – we cease to derive as much pleasure from it. By self-rationing our indulgences, we may actually increase our enjoyment, as well as spending our hard-earned money more efficiently.
3. Buy time – money and time are frequently interchangeable. Most of us wish we had more free time to do more of the things we love, yet research suggests that wealthier people tend to spend more time on stressful activities such as commuting & working. It makes sense, where possible, to structure your spending with this paradox in mind. Move closer to the office or hire a cleaner!
4. Pay now, consume later – in our modern culture of instant gratification and credit card purchases, this principle goes against the grain, but paying in advance has two major advantages. Firstly, we derive significant enjoyment from the anticipation of a holiday, or whatever we are buying. Secondly, we separate the pain of paying from the appreciation of a purchase, leaving us free to relish it without thinking about the cost.
5. Invest in others – the final pointer relates to spending on other people, including charitable donations. There is evidence that increasing our spending in this area (as long as we do not leave ourselves in need) will increase our own happiness by more than if we’d spent the extra money on ourselves. For maximum effect we should feel a connection with the cause or recipient and be able to see the impact of our generosity.
I appreciate that some of these insights are actually pretty obvious, but do we put them into practice? When it comes to financial planning, perhaps we should all focus as much time and effort on efficient spending, as we do on efficient saving and investment.
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
Contact Ian Thomas at Pilot Financial Planning:
08453 712 808, ian@pilotfinancialplanning.co.uk
www.pilotfinancialplanning.co.uk
Pilot Financial Planning is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.
First Published August 2013 By The Dart