Planning

How Much Money Will Make You Happy?

How Much Money Will Make You Happy? :: Mint.com/blog

“To know that you have enough is to be rich.” –Lao Tzu

If I handed you a check for $1 million, would you take it?

I’m sure your first reaction would be, “Of course!”  But if you really thought about it, what exactly would you do with all that money?

As a financial planner, I hear a lot of people say they want and need more money. However, they have no idea what they’ll do with it.

Even though we’ve all heard money doesn’t buy happiness, a lot of people still believe it will. They believe money will solve all their problems.

While I do believe a certain amount of money is required to handle your short-term needs, such as paying for your current bills and making sure there’s food on the table, the truth is, having more money does not guarantee you’ll be happier.

However, knowing the right amount of money you need every year to pay for your expenses and save for your future financial goals can definitely help bring more happiness and fulfillment into your life.

How Much Money Do You Really Need to be Happy?

When thinking about your financial future, it’s critical you get super clear on how much money you need to live a life you enjoy right now, but also how much you need to be able to save for a life you’ll enjoy in the future, as well.

When you feel you can cover both of those things, fears about not having enough seem to melt away and you’re able to live more freely, which can result in more happiness in your life.

According to research done by Dunn and Norton, the amount people need to be happy averages about $75,000 per year.

That means that people who made $75,000 each year were, overall, happy and content, and also that anything more than that amount had no effect on people’s happiness or moods.

What’s Your Magic Number?

When I work with clients, I help them figure out how much money they need every year to live a life they love today—and one they can enjoy in the future. I call this the magic number.

Simply stated, a client’s magic number is the amount of net income needed every year to cover his or her current lifestyle costs, save for the future and spend money on things he or she enjoys in life.

Any amount above that magic number is great, but if the client at least reaches the magic number goal, the chances he or she will feel happy and fulfilled in life are greater.

Let’s Look at an Example

If you’ve never thought about your own magic number, now’s the time.

I believe you should work with a CERTIFIED FINANCIAL PLANNERTM practitioner to help you calculate your magic number effectively, but in the meantime, let’s look at an example to help you understand how this works.

Example:

Sara wants to calculate her magic number.

Sara starts by adding up her basic living expenses, including her housing costs, student loan payments, car payment, and other basic expenses such as food, gas, medical bills, etc.

Her basic living expenses equal $40,000 a year.

Next, Sara takes the time to think about what truly makes her happy in life, and concludes that spending time with her family and friends, traveling to new places and meeting new people, and maintaining her health fulfill her top values—in other words, love, connection, learning and health.

So she decides she wants to spend money on the following things every year:

  • A personal trainer to stay healthy and fit: $1,200 per year.
  • Traveling internationally once a year to learn about and experience different cultures: $4,000 per year.
  • Spending time with her family and friends over nice meals and mini getaways: $2,500 per year.

Sara also takes the time to realize that she does not gain any happiness from the following things:

  • TV. She would rather spend her time meeting new people or trying new things, so she decides to cancel her cable.
  • Designer clothes. Not so important to her, so she decides not to spend too much on clothes every year.
  • The latest electronics. Sara would rather spend money on experiences as opposed to gadgets, so she commits to not upgrading her phone every time a new model comes out.

Then she reviews all her financial goals and decides she wants to save:

  • $17,000 into her 401k every year for her retirement goal.
  • $5,000 into her emergency fund.
  • $5,000 in extra student loan debt repayments.

In total, Sara calculates that her magic number is $74,700. That means she will need a net income of just under $75,000 to feel happy and satisfied.

Anything above that would be great, and anything below that number would mean she would have to cut out some expenses—which may result in her feeling less happy or fulfilled.

So $75,000 in net income every year is her goal.

Once you define your magic number, planning for your financial future becomes so much easier.

The magic lies in the fact that now you’ll know exactly how much money you need to make every year—and you’ll know exactly how to allocate it both monthly and annually so that it brings you the most joy, satisfaction and happiness possible.

Brittney Castro, CERTIFIED FINANCIAL PLANNER™, entrepreneur and personal finance expert for women, is the Founder & CEO of Financially Wise Women, a Los Angeles based financial planning firm for women.  She specializes in working with busy professional and entrepreneurial women who are passionate about life and want to gain clarity around their money.  Brittney’s mission is to help women plan and create the life of their dreams, free from anxiety about money.   She is known for her innovative, non-judgmental, compassionate approach to financial planning.  She has been featured in the Wall Street Journal, New York Times, CNBC, Financial Planning Magazine, Investment News, and Registered Rep Magazine.  Away from the office, you can find Brittney working out, drinking green juice, reading, playing at the park with her dog Arya and of course dancing.  Sign up to receive your Financially Wise Toolkit jam packed with great tools and resources to help you on your financial journey at www.financiallywisewomen.com.  Follow her on twitter at www.twitter.com/brittneycastro.