Friday, August 25, 2017

Happy Money

The book, Happy Money: The Science of Happier Spending by Elizabeth Dunn and Michael Norton, summarizes current research on how you spend money changes how happy and satisfied you are in life and affects your health and well being.

This is a wonderful book that explains how you can increase your happiness by spending on experiences with the people you value rather than spending on prestige belongings that many people think will make them happy.

According to the book, research shows that spending money on leisure activities like trips, movies, sporting events, gym memberships and the like leads to more happiness than buying expensive consumer and prestige items. Experiences tend to be appreciated more as time goes by whereas things tend to be less appreciated as time goes on as better things than they bought emerge. Experiences tend to make us feel more connected to other people which improves life satisfaction. When couples do exciting and novel things together, their relationships improve. Anything we do to make the time with our friends or partners special is money well spent. Experiences make memorable stories for retelling for years to come and give us a sense of who we are or who we want to be. Experiences can’t be compared  to things purchased. Experiences that remind of us of the past and give us nostalgia, like going to a museum, watching an old movie, or hearing a favorite song, can bolster our vitality and reduce stress.

Research indicates people earning over $75,000 a year do not have an increase in happiness. High income individuals spend more time doing high stress activities like working, commuting, and shopping than those who make less. High income individuals view their time as highly valuable which makes them feel like they have less time. In contrast, buying time, called time affluence, increases happiness. You can gain time affluence by moving closer to work to reduce your commute, working in a job that requires less hours, or hiring people to do your yard work or cleaning.

Research shows that having expensive things does not bring happiness, health, or well-being. The University of Michigan found that those with cheaper cars had the same satisfaction driving them as people with expensive cars. Surprisingly, homeowners are not happier than renters, and are on average are 12 lbs heavier than renters. Those who simplify their lives by reducing their wardrobe, moving into a smaller abode, changing their consumption patterns, and reducing their stuff are happier. The enemy of appreciation is abundance; if we make everything we do special it will increase appreciation and happiness.

I highly recommend this book for people wanting more happiness, time, and life satisfaction. Five Stars. 

Saturday, August 5, 2017

Common Sense Investing

I found a lot to like about the The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns by John C. Bogle. Mr. Bogle was the founder of The Vanguard Group and is famous for creating the world’s first index mutual fund in 1975, the Vanguard 500 Index Fund.
The logic of his index fund was to invest in a large number of stocks, all the stocks comprising the S&P 500, to make money from the combination of their growth and dividends. This is a departure from the more common view of investing in undervalued stocks to make money from an increase in their stock value.

Bogle makes a convincing argument that the best way to get the value from the stock market is to invest in all the stocks by buying mutual funds based on indexes of the market that invest in all the stocks.

The author points out that the real net income from stock investments is the investments’ gain minus the cost of the investments. The costs are relatively easy to determine in the case of retail brokers charging for a stock trade when buying or selling  stocks. However, the costs are much more complicated for mutual funds because, in addition to the cost of the trade, in many cases there is an annual incentive sales fee for the broker for up to five years (up to 1.5% a year according to the author). I had no idea that there were hidden sales fees in addition to the purchase fee charged by the brokers. In addition to annual fees, most mutual funds typically have additional management fees of 2 to 3%. In comparison, index funds have low management fees (often .4% or lower) with no hidden sales fees.

What is more disturbing is that 99% of mutual funds significantly underperform the S&P 500 index. When the excessive costs combined with the underperformance of mutual funds are compared to S&P index funds, the long term income differences are shocking. The net return after taxes of $10,000 invested in an indexed fund from 1980 to 2005 would have been $76,200 versus $16,700 for other mutual funds (for those mutual funds that survived). This represents 456% more net income to the investor with far less risk.

If you are one of the 85% of investors who let their broker "manage" their assets, Bogle’s book may keep you awake at night. To sleep better, I switched to low cost, low risk index funds. 

The author’s perspective is unique since he invented the very first indexed funds. It is a little like reading Thomas Edison's thoughts about the light bulb. Bogle knows the issues and history of investing in indexes versus other types of mutual funds.

This "common sense investing" book was easy to read and easy to understand. I highly recommend it to anyone wanting their investments to produce more income with less risk.  Five Stars and hats off to the founder of index investing. 

Friday, July 28, 2017

How your Bank Balance buys you Happiness

I recently read an interesting study, How your bank balance buys happiness: The importance of "cash on hand" to life satisfaction, by Ruberton, Gladstone, and Lyubomirsky from the University of California, Riverside and Judge Business School, University of Cambridge. The study claims having more cash in your checking and saving accounts leads to increased life satisfaction.

This is the first study on money to use actual banking records from the participants to assess how their “liquid wealth” affected their life satisfaction. Previous studies only used self reported estimates of bank account information. In addition to the previous year of bank records, the participants took a Life Satisfaction survey and a two question Perceived Financial Well Being survey. Measures for the study also included Income, Total Spending, Total Investments, Indebtedness status, Employment status, and Relationship status. Another key detail was anyone who had greater debt than savings was excluded from the study.

The study’s results confirmed previous studies findings that people with higher debt have lower life satisfaction and people with investments have higher life satisfaction, as do people with an income high enough to have a moderately good quality of life (approximately $75,000). It also confirmed studies showing that life satisfaction is unrelated to income above $75,000 and people with no debts have higher life satisfaction.

The new revelation from the study was that having more cash in savings or checking accounts increased financial well being and life satisfaction more than any other factor, including total debt, income level, or investments. The study found that with each increase in cash by a factor of ten, life satisfaction increases by 3.45%. So an increase in savings from $1 to $1000 increases life satisfaction by about 10.35%. The next 3.45% increase in life satisfaction is at $10,000 in cash. And another 3.45% increase is at $100,000. The next 3.45% increase in life satisfaction requires a million dollars.

Even people with very large investments (over ten million dollars) who had small amounts of liquidity in their bank accounts had significantly lower levels of financial well being and life satisfaction than those with vastly lower investments yet more liquid wealth in cash.

What is unclear about this new finding is if it is the result of the 2008 financial collapse, since investments may not provide the same feeling of financial well being as before. Or is this something that has been true for a long time and not previously found due to self reporting biases, since actual bank statements were not used in the past. 

The researchers also raised the alarm about how much the long-term, extremely low interest rates from banks may be costing society in happiness and well being. These low rates punish those who have more cash in savings.