The Right Way to Spend Money

Interview with Jonathan Clements

Does money buy you happiness? Perhaps not, or at least not in a very straightforward way. The answer to that question hinges on many factors, key among them being how you think about money. Jonathan Clements, former columnist with the Wall Street Journal, author and founder of HumbleDollar.com expounds.

Douglas Goldstein: I am very exited to have on the Goldstein on Gelt Show, Jonathan Clements who is the founder of HumbleDollar.com, and author of seven personal finance books. His latest book is called How to Think About Money.

Maybe you’ve seen Jonathan because he spent about two decades at the Wall Street Journal, where he wrote the newspaper’s personal finance column. Jonathan, tell me, you talk a lot about happiness. Why hasn’t money bought happiness?

What is the Hedonic Treadmill?

Jonathan Clements: It’s a great question Doug. If you look at the statistics, it’s not always conventional. We all imagine that money will buy happiness. But in the U.S., there’s this survey that’s been conducted since 1972, called The General Social Survey. As part of the survey, people are regularly asked whether they’re “very happy”, “pretty happy”, or “not so happy”.

Even as the standard of living in the U.S. has more than doubled over the past 40 years, the number of people who say that they’re very happy has not changed. Money has not bought happiness. It should have, I believe, but it hasn’t.

The question we all need to ask ourselves is, why not? Fundamentally, when psychologists think about this issue, they point to something that’s called the “hedonic treadmill” or “hedonic adaptation.” What is that?

What it is, is when you go out and buy the new car because you’re sure it’s going to make you so much happier. Initially it does, but pretty soon we adapt to the new car. We get used to it, and it’s just another way to get around town. That sort of cycle occurs in our lives all the time.

Douglas Goldstein: Is it possible people are just not shopping in the right stores?

Jonathan Clements: It may be that they’re not spending their money in the right way. It seems that we do adapt to material improvements in our lives very quickly.

If you can take somebody who’s in poverty and lift him out of that, obviously you can greatly improve his happiness. But once you get people to a basic standard of living, it really takes a lotof money to measurably improve their level of happiness. This is because of this process of adaptation.

Nonetheless, I do believe that money can buy happiness; we just have to be a whole lot smarter in the way we spend our money.

Money Can Help Us Improve Our Level of Happiness

Douglas Goldstein: What about the idea of security? One of the things I talk to people a lot about in my day job, as a financial adviser, is not about how to become rich. In fact it really kind of bugs me when people come into my office and they say, “Well Doug, how much money can you make me?” And, “What’s the stock market going to do this year?”

I have to explain to them that I am not a prophet and I have no idea. Then I turn the question around and I say to them, “How much money do you need, and what are your future needs? What’s your retirement going to look like? Do you need to help your kids?”

Oftentimes, I find, especially with very high net worth clients, they don’t need to take a lot of risk. They don’t need to build a portfolio because they have enough money to do what they want to do.

Is that a level of happiness which is sufficient? Or do people somehow feel driven; that they just have to always make more and more money?

Jonathan Clements: When I think about what happiness could do for us Doug, I really think about it in three buckets. One of those buckets you just pointed to – one of the great things money can do for us is help us to not worry about money.

When we have enough that we’re not constantly concerned about how are we going to pay the bills, put food on the table and have shelter over our heads, if we can get to that level, where we don’t directly worry about money, we’ve achieved one of the three great things that money can do for us -- that can help to improve our happiness.

There are two other things that money can do for us. One, it can allow us to have special times with friends and family. Having a strong network of friends and family gives an enormous boost to happiness.

Relationships Can Measurably Improve Your Happiness

Jonathan Clements: If you’re going to spend your dollars on anything, you should spend it taking the entire family on vacation.

Or going out to dinner with friends, or flying across the country to see the grandchildren. If you spend money on friends and family, having special times with them on these sorts of experiences, you can measurably improve your happiness.

The third thing that money can do for us, is that it can buy us a level of financial freedom so that we can spend our days doing what we love. We have this crazy notion that what we really want in our lives is to relax - sit around all day, watch TV, read the newspaper. That’ll make you happy for about two days.

What you need in your life is a sense of purpose, and to have that, you need to spend your days doing what you love, what you’re passionate about, what you find challenging, and what you think you’re good at.

We get enormous satisfaction from work, but only if it’s work that we really enjoy, and we think we’re important. If you have some level of financial freedom, you can spend your days doing those things. That can also measurably improve your happiness.

Are Riches a Ticket to Anything You Want?

Douglas Goldstein: We’re speaking with Jonathan Clements, the author of How to Think About Money. He is talking aboutthree areas that he is focused on that show that money can really help.

One of them is security. The second thing is that having money allows you to have special (good) times with family and friends. The third thing is it actually lets you have financial freedom, giving you the opportunity to pursue what it is that you want.

Now, it’s interesting that you talk about it Jonathan. A lot of people envision that if they were wealthy, everyone would come to them, and other people would think they’re really smart. I am thinking of the song from Fiddler on the Roof (“when you’re rich, they think you really know”). That you get a lot of respect, and you do whatever you want.

But on the other hand, interestingly, your website seems to be the complete opposite. The title of your website is called the HumbleDollar. Where does humility fit into all of this?

Jonathan Clements: Humility is important in so many different and basic ways. It’s important that when you invest, you shouldn’t imagine that you know more about the future than you do. Some of the things you want to do is diversify broadly so you don’t end up with too much of your money invested in any one stock. Or in any one sector of the economy.

You want to be broadly diversified, not just within the stock market, but across different asset clauses. Have some money in stocks, some in bonds, and some in cash investments. You also ought to be humble about what you expect from the financial markets. Maybe we’re not going to get those super high returns that we’ve seen historically. Therefore you want to compensate by making sure that you save a decent amount of money every month.

But on top of that very basic thing about market returns, you should also be humble about what you imagine money can do for you. We do imagine that if we simply have more money, or spend more money, somehow it’s going to make us happy.

Yet, as we talked about earlier in this show, the statistics tell us that even if standards of living rise, often people’s reported level of happiness does not increase. We need to be much more thoughtful in the way we use our dollars. If we do that, I believe that money can buy happiness.

Douglas Goldstein: It’s interesting that it’s okay, I would guess, that someone in my field who’s helping people to build wealth would talk about building wealth and actually having more money. Is that what ultimately would make them happy? Is that what you’re saying?

Jonathan Clements: If the money is spent in the right way. Take the great goal of retirement, which is what we spend our entire working lives trying to achieve. Retirement sits out there, somewhere in the distance; a mythical place where we can be relaxed and happy and do whatever we want.

My reaction to that is it’s a crazy notion, and so many people are disappointed. I mean, the level of depression among retirees is higher than among the general population. Also, the number of suicides among retirees is surprisingly high.

This isn’t guaranteed to be a happy time in your life and one of the reasons is retirement is misconstrued. We imagine that what we want is just to sit around and relax. In fact, I think the distinction between work and retirement needs to disappear.

Instead of thinking about retirement as the time to relax, we should think about it as the time when we can continue to work hard at stuff that we think is important without worrying so much about whether it gets us a paycheck.

If we think about retirement that way, then we’re much more likely to have a fulfilling final couple of decades in our lives. Not only will that sense of fulfilment make us happier, but also there’s a lot of evidence that if people are intellectually and socially active, they’ll actually live longer.

Douglas Goldstein: That’s a great point. I don’t have the studies myself, but I do have anecdotal evidence that that really is true. That the people who continue to be involved, and aren’t just sitting around doing nothing, waiting for their next income check to come in are actually much happier.

At the end of the day, having money does give you that sense of security, and we do need that so that you’re able to retire. But it’s not the be all and end all.

I ask a lot of people who talk to me about early retirement, or tell me that they’re so excited to build up their wealth for retirement, “What are you going to do when you retire?” That becomes a much more important discussion.

Follow Jonathan Clements

Hey Jonathan Clements, I see we’re just about out of time. But in the last few seconds tell me, how can people follow you and follow your work?

Jonathan Clements: If you want to keep up with my writing, the best place to go is humbledollar.com, where there’s something new everyday. On Twitter, you can follow me @clementsmoney.

If you want to learn more about my thoughts on money and happiness, I’d encourage you to pick up a copy of my latest book, How to Think About Money.

Douglas Goldstein: Okay. We will put links to all of that at the show notes of today’s show. Jonathan Clements, thanks so much for taking the time.

Jonathan Clements: Thanks for having me on the show.