Would you like a pay rise? Of course you would! Everyone likes to earn more. And money is a natural motivator. We work hard and seek opportunities precisely so we can acquire it. Then we spend or save or invest depending on our needs and wants. We don’t consume just for the sake of it, either. The idea is that we get something valuable in exchange, like comfort, pleasure, or freedom.
We might also expect, therefore, that our satisfaction should rise in line with our means. In other words, we tend to believe that a rich person is more content than someone who is just getting by. What psychologists and economists find instead, though, is that money doesn’t buy happiness – at least not in the long term. While most people experience a brief emotional lift after a positive change in fortunes, they quickly adapt to the new normal and stop feeling the benefit. Even when that change affords nicer things – a better car, a bigger house, luxurious holidays – the effect is not lasting.
This is called the ‘hedonic treadmill’ and describes a kind of material reversion to the mean. Everything averages out and eventually you get back to where you started. This might explain why Warren Buffett doesn’t live like a billionaire, preferring simple pleasures like cheeseburgers and Cherry Coke over exotic delicacies he could easily afford. Obviously, not everybody can be a legendary investor with endearingly inexpensive tastes. We want more and we want better – and there is nothing wrong with that. But it is worth thinking about the relative benefits of delayed gratification, especially if you want to maintain your lifestyle into retirement. Taking too much today makes it hard to sustain yourself tomorrow.
The danger of getting on the hedonic treadmill as your finances improve is that you will consume your future happiness today by spending more than you need to maintain your baseline level of contentment today. Instead, it probably makes more sense – in terms of maintaining that baseline for as long as possible – to make sure your future financial needs are taken care of, via smart investing, before allocating money towards incremental lifestyle improvements as your means improve.
This is really an elaborate way of saying it is better to build wealth than to spend income, especially if you actually want to feel the benefit.