In the preceding episode, we discussed how to consider what “The Good Life” could look like for you. It will be different for everyone, but we reviewed the literature on what people tend to find happiness and satisfaction from. Plus, what they regret and how we can use that to avoid or learn from our own regrets. Managing our time and money can help us to live “The Good Life”. Financial planning helps to map that journey into the future. However, we can easily go off course along the way. In this episode, we’ll unpack some of the common money traps that we get ourselves into. How we are wired to take the bait. And some of the clues from the academic literature that we can use to recognize and avoid the traps. Or work on extracting ourselves. We finish with some personal questions to ponder to help you stay the course or make deliberate adjustments without ending up in the ditch. Consider your own core values, what “The Good Life” looks like for you now, how that may change in the future, and reflection on the past. Hopefully, you’ll take the bait and join us presently for the podcast.
[00:00:02] BF: Welcome to the Money Scope Podcast, shining a light deep inside personal finance for Canadian professionals. We are hosted by me, Benjamin Felix, Portfolio Manager and Head of Research at PWL Capital. And Dr. Mark Soth, aka The Loonie Doctor. This episode of Money Scope is going to look deep inside the money-happiness traps that people in general and professionals, in particular, can get sucked into. And then we’re going to finish with a set of reflective questions designed to help people think through applying this information to their lives. Then, in our next episode, we’re going to synthesize and expand on the information from the last two episodes and present a set of principles that we think can help people in making good life-focused decisions.
[00:00:43] MS: Yes. So then, we’re going to use the information from the Money Scope. This time, we’re going to have that mixed in with a little bit of morbidity, mortality kind of rounds, to see what are some of the cases that can happen that land us into trouble. Then, next week, we’re going to do some more therapeutic maneuvers with the scope.
[00:00:59] BF: All right.
[00:01:00] MS: So, I think the room is ready, and let’s get going.
[00:01:02] BF: Let’s do it.
[00:01:06] BF: You’ve also seen firsthand, Mark, how people get lured off course by what you called, in a great blog post on this, the earning and spending trap. Can you explain what that is?
[00:01:16] MS: Yes, thanks, Ben. One of the reasons why I wrote about that earning and spending trap is actually because I spent about 10 years in that trap. And when I started working as an attending physician, I really, I was unprepared for the higher amounts of money that I’d be dealing with, because that would limit me from decisions up to that point. I was also limited by opportunities that were available, which you have much more available to you as a professional because you’re able to self-regulate to a degree. So, I fell into it for 10 years. I’ve seen lots of friends and colleagues fall into it. Really, there’s two sides of this trap.
I think we hear a lot about the spending side of the trap because this is the hedonic treadmill concept that we mentioned earlier. There’s a physiological adaptation that gets us into this escalating spending cycle due to our adaptability. Adaptability is great for changing conditions. It’s helped humans survive as a species. But modern humans have trouble with it, because we’re constantly bombarded with options to get the next thing, and we actually have those options. We can make it happen, at least in the short term, of there could be an item, and that’s what everybody talks about usually is stuff. But it could be spending money on experiences or achievements, or time to achieve something, it doesn’t matter what it is. It’s something that makes you feel good and then you adapt to it, whether it’s an item or a promotion. Then, you’re looking on to the next thing. You see it, you want it, you get it, you’re used to it, you’re looking for the next level, whether it’s a next level of experience or some kind of recognition from something. So, we can do that and continually to get up to the next level, it takes us usually more and more spending, or more and more life force invested to get there. So, it just keeps ratcheting up fire faster and faster until you find that you’re suddenly running flat out on this treadmill, and you don’t really notice until there’s a problem. The classic things would be that you run out of breath, due to a pile of debt, or some unexpected flat cash flow crunch comes up, a job loss, or something and then you trip and do lip skid. So, you don’t notice the speed of the treadmill going up, but you notice when you got a problem.
[00:03:17] BF: When we touched on this earlier, that hedonic treadmill can be used against us. We’re always going to be tempted by advertisements and seeing what people around us are doing, and people in high-income professions will likely see their colleagues spending lots of money on stuff, or trips, or cars, or whatever. And that leads us to the issues we talked about earlier where you get tempted to do this immediately rewarding behaviour, like buying stuff or booking the trip. But it really takes that effortful thought to avoid those traps and focus on what actually leads to a good life, as opposed to the hedonic stuff.
[00:03:48] MS: They’re great for that. There’s an app for it. There’s an app for everything. This is like the hedonic treadmill workout app. That’s the part I think that a lot of people talk about, and that I think is very common in personal finance is that side of the equation.
But I think for professionals, we’re especially susceptible to the other side of the equation, which is the earning bait side of the equation, and it can lure us into the trap, too. Why does that happen? Well, one of the things is that whether you’re self-employed or an employed professional, we actually usually have a lot more options to increase our hours than the average employee. It’s easier for us to do that. And we may have a different relationship to work than many people do. I mean, this applies across professions or business owners, but I’ll use medicine as the example, because that’s how I became acquainted with the bait. But it becomes wrapped up with our identity and our mental, social, and financial reward systems. We have a lot tied up in our work.
For me, I spent decades wanting and training to be a doctor and people know about the long time it takes to train to do that. But it wasn’t just the time. It was like a consuming degree of focus, to constantly be focusing on what to do to improve and get to that next step of that journey. So, when I made it to finally being a doctor, it had formed actually a pretty major part of my identity. That’s natural too, because besides the time and effort we put into it, medicine is a very alluring field to work in, and we are constantly learning new things. You’re helping people, you’re applying hard one skills that you’ve developed, that are special. And those are all kind of core values for me. So, for me, it was very easy for me to want to work more and more and more, because it was part of my identity. It was alluring in its own right. You’re also part of a special club that experiences things that the average person doesn’t experience. You get an inside view to people’s lives and to a lot of exciting things that you can do. So, it feels special that way, and it comes with a degree of respect. Plus, it pays well, too. So, all of these positive factors can lure you into working more and more. In medicine, there’s pretty much unlimited demand. Nothing’s going to stop you from working more and more. For most things. I mean, there are some limits like OR time or whatever. But you can often find other ways around it. In fact, medicine celebrates this. We have this culture that celebrates people who give up basically everything to meet that unlimited demand, as much as they can. So, it’s a very easy trap to fall into. You end up with lots of money when you do that too, to backfill for that missed time, and you end up starting to use your money to backfill for the time that you spent doing that career. It’s common in many professions outside of medicine too. It’s not just a medicine thing. But that’s how I got wrapped up into it.
[00:06:27] BF: You’re lured to spend more and then you work more to pay for it. And then you are lured to work more, and then you spend more to pay for it.
[00:06:34] MS: Yes. It can get it from either side and everyone’s personal mix is going to be a bit different. The problem is when the trap spring shut, and it can spring shut very suddenly, as we’ve mentioned before. The reason why that could happen, you could have expenses that just keep rising, but then you become burnt out, or you have a health issue, or a family member has a health issue. You just can’t earn and work at that pace anymore, for whatever reason. When COVID hit and OR shut down for a time there, you just couldn’t work. And all of a sudden, that was a shock to the system. But I think the ultimate spike-pit-trap for this type of problem is divorce. If you neglect your marriage and your relationships, because you’re working more and more, which may feel like you’re working and doing good things and providing for your family. But if you’re not actually paying attention to those relationships with your family, and that breaks down, not only do you have that breakdown, which has major financial and emotional implications, but you’ve actually set that treadmill at a fixed high speed, because you’re going to go to court, and you’re going to have to continue to pay for that lifestyle, whether you can do it or not. If you do want to try to turn down the treadmill speed, you’re going to have to go back to court to change the payment arrangements. So, the best thing you can do is to recognize it and avoid it if you can. It’s pretty scary. I mean, if you want a visual of what can happen, just go on Google and type in treadmill mishaps, and you’ll see all sorts of videos and pictures about what that’s probably like. We can try to buy happiness, and we may also enjoy our careers. But the relationships between higher income and lasting happiness are actually much more complicated than that. There has been a lot of research in that area. Perhaps you can give us a few insights into that, Ben.
[00:08:11] BF: Very closely related to the earning, spending trap that you just described, is that people often think that more money is related to more happiness,1 and that leads to thoughts like “I’m going to work really hard now to get more money, and I’ll be happy later when I have lots of money.” But the relationship is a lot messier than that. And research is ongoing. There’s new research coming out on this even this year.
But if we go back, there’s an influential 2010 study on a US sample,2 and it found that life evaluation rises steadily. So, that’s the eudaemonic happiness we talked about earlier. Rises steadily with income, but experienced happiness rises with income up to about 75,000 US dollars, and then plateaus. The authors of that study conclude that high income buys life satisfaction, but not happiness. And a low income is associated with both low life satisfaction or low life evaluation, and low emotional wellbeing. Then, just as a point of interest, other studies have found that increasing income does seem to offer the absence of sadness, which is distinct from happiness.3,4 That’s kind of an important point.
Then, there’s a 2018 global study.5 So, the first one is the 2010 study with the US sample. The 2018 sample is global, much larger sample. It identifies points of income satiation, above which both experienced happiness and a life evaluation stop increasing. The satiation point for life evaluation in this study is about 105,000 USD in North America and experienced happiness satiates about 65,000 USD in North America.
Now, in that study in some parts of the world, including in North America, they see a decline in life satisfaction at the highest levels of income.
[00:09:47] MS: That was one of the studies that I first read about it, and I thought it was interesting. I think the thing with that global sample, I actually tried to take some of that and change it to Canadian dollars and they also have some adjustments in there for family size. So, I thought that was interesting that it could decline at a certain level. Just as an example, every time I present this data to people, they’re, “Well, yes. It’s different where I am, because there’s no one who could possibly be happy on that amount of money.” But if your candidate was about 210,000 Canadian dollars for a household of four, and if there’s a correction factor that kind of goes down based on how the size of your household is.
The point is that there is a level where you do hit satiation. And after that, you may actually have a decline in happiness or at least a plateauing.
[00:10:32] BF: The authors, they don’t do research on this aspect of it. But they do cite a lot of other research to suggest why that observation may have been there. It’s probably not due to the higher income, which maybe that’s intuitive. Having more money doesn’t necessarily make you less happy. But it’s the, what comes with that. Having things like more demands on your time,6 less time for leisure activities,7 and both of which are associated with being less happy, having more demands on your time, and less time for leisure activities are both independently associated with lower levels of happiness.
An increase in materialistic values,8 that’s another thing that’s associated with decreases in happiness. Increased social comparison.9 That’s like you start looking at other people who have high incomes, and all of a sudden, you maybe go from being higher end of the middle class, to the lower end of whatever you call the next thing. I don’t know if it’s upper class if that’s still a thing. Whatever it is. You start comparing yourself to people with more money, and all of a sudden, you feel less satisfied with what you have. And then there’s other stuff kind of related to that. But like living in a more expensive neighbourhood.10 All of a sudden, you have a much higher income, so you live into a nicer neighbourhood, and then kind of like I was just saying, all of a sudden, you don’t feel so good about your level of income. Those are all speculations by the authors of that study. But each of those statements is independently backed by other research.
[00:11:47] MS: There was another study that was done in 2021.11 This one wasn’t global. It’s just US sample, and they used real-time reports using a smartphone app. So, it was a different methodology. But it was interesting because they had some results that using – compared to a study earlier that it had a similar methodology, that was a bit different. So, they found that both experienced and reflective happiness actually increased with income with no observed satiation point.
It never actually dropped and went down. But it kept going, even with higher incomes. That was feeling better day to day and being satisfied with their life overall. Those are kind of the main data points they were collecting. But they collected a bunch of other sub-data, which was interesting.
I would say, even though there was no satiation point, though, it is important that it was actually a log-linear increase, which means that as income went up, you didn’t get the same return on happiness. It would get blunted off pretty dramatically. So, diminishing happiness returns for increased income, although still increasing very slowly. They went back with the authors of the previous study, which was done in 2010, that found a plateauing, and they combined looking at the results together in an adversarial collaboration, which they published in 2023,12 because they wanted to try to understand how they fit together, why they’re getting results, and try to see where the truth would lie, or how they could reconcile.
It was really interesting because they found that based on everything else that we’ve talked about, they actually found that probably your mindset actually matters as much if not more than your income. So, what they found was that if they divided out their data into how happy people were in general, people that were happier, as their income went up they increased their happiness, even more so than the average. And then on the other end of the spectrum, when they looked at the bottom quartile or quintile, the people that were at the bottom are the ones who are really less happy people see a plateau at higher levels of income and making more income actually does not make them any happier.
So, it’s not just income. It’s actually how your baseline happiness is and how you view things, whether it’s through an abundance look at it, where you have more opportunities with the income, or whether you’re always looking and feeling like you don’t have enough.
[00:13:50] BF: I think on your blog, you’ve described it as Tiggers and Eeyores.
[00:13:53] MS: Yes. Tiggers and Eeyores, exactly. If you want to be a middle-of-the-road Winnie the Pooh. Honey makes you happy.
[00:14:00] BF: Right. On money and happiness, I think, that the broad conclusions that we can pull out of what we talked about. The big one is pursuing money, for the sake of money is probably going to be actually detrimental to living a good life. There’s research on this too. People who are focused on extrinsic objectives like money, fame, and image, as opposed to intrinsic objectives like personal growth, intimacy, and community.13 They tend to be less happy in general and they tend to overestimate the emotional benefits of achieving their extrinsic goals.
People overestimate how much happier they would be with a higher income,14 which again, is I think, that trap of, “I’ll be happy later. I’ll work hard now to get a higher income or more money and I’ll be happy later.” But when money is made the goal, rather than a means to achieving other important things, people tend to fixate on getting more money,15 which just feeds into this whole issue. We know of, empirically, social comparison and the hedonic adaptation, they’re pretty unforgiving. Even the wealthiest households in some studies tend to believe that they would need a lot more wealth in order to be perfectly happy.16
[00:15:05] MS: That study you mentioned about the really wealthy household had another interesting finding in it too. One of the things that they found that those who inherited their money, were less happy than those who had earned the money. It may not just be actually the level of income and the level of money that’s there, it’s actually what went along with that. It may be a representative of personal purpose and achievement to earn those dollars, rather than just the dollars themselves.
It’s funny because I’ve used that data actually to discuss with my children about why we’re not going to give them a giant inheritance. We don’t want to steal the joy of them earning their own way. They disagree with that. But it’s an important issue for us as wealthy parents, because we want to make sure that we give our kids every opportunity that we can to reach their full potential, and we’ll use our money to that end, no problem. But we just have to be careful that at the same time, we don’t deny them the pleasure of earning their own way. That’s kind of a constant tension and struggle that we’ve had.
[00:15:59] BF: There’s one paper on this topic that I really liked. I mean, there’s tons of papers on it. But one that has a really nice quote, I think, to finish the section with. It kind of captures the message that, I think, we want to leave people with. So, here’s the quote, “Money is an opportunity for happiness. But it is an opportunity that people routinely squander because the things they think will make them happy often don’t.”17
[00:16:18] MS: Yes, I know. I think that’s a great quote. The thing is, we don’t realize that till afterwards.
The last trap we had to talk about was the social comparison trap, and this feeds into everything we’ve talked about. But there’s some good data on it too. So, even while you’re earning your own way, and we know that’s probably going to make you happier than just being given income from the data that’s there, you can still have some of that joy stolen away by comparison. Germany actually has a very granular database of income and happiness right down to the level of individuals and their professional fields.
There was one study using that database where they looked at happiness levels and income, and they found that where it once hit compared to your peers, within your peer group, was a much more powerful determinant of satisfaction than comparison to others outside of your peer group.18 So, we compare ourselves to those that we work with as colleagues. And this is really important for us who work with other high-income professionals because that’s who we compare ourselves with.
It’s interesting, and a follow-up study of that dataset showed that personal job satisfaction and personal income trajectory actually negated a lot of that effect.19 I think if I were to take that research and try to apply that to myself, what I would say is what maybe I should focus on what you’re trying to achieve in your career, and how that aligns with your internal goals. That’s the valuable mindset. Again, the comparison to the others around you within your peer group is going to be more detrimental. That thread of intrinsic versus extrinsic focus somewhat makes us happy, I think is woven throughout our lives, even beyond work to all of our social lives.
[00:17:48] BF: We’ve mentioned social comparison a few times throughout this because it’s so important. But just to reiterate it, our well-being is affected by how we compare to those around us.20 I said this earlier, but it’s the kind of thing where like, we don’t want to think that’s true but it is. So, on the research on that people living in more affluent neighbourhoods, they exhibit increased material desires, more frequent impulsive buying, and less saving.21 And then people who spend their time in areas where they’re better off than the average person, have greater life satisfaction and emotional wellbeing. It’s crazy to think about, but I mean, it’s that’s what the data say.22
Then, the other issue here is that, in order to keep up with the people around them, many people maintain a lifestyle that’s kind of just outside their means, which drives down their savings rates and puts them in an increasingly precarious financial position.23 That’s true even for affluent households, because there’s always somebody above you, at least for most people.
[00:18:38] MS: This was actually one of the most powerful strategic moves that my family and I made. We were kind of on the cusp of financial independence. Close, but not quite. But we decided that that was close enough that if we made a change, we could change how we are living our lives. So, we actually decided to move to a different city. Most people at the time, I think thought we were nuts, because we had a castle literally that we live in. We had like a stone turret and lots of big wood beams, and everything. It was really a beautiful house and it was in a very affluent area. We had some acreage.
We moved from that giant house in a very affluent area into a nice neighbourhood and more of a middle-income community. I think that allowed us to move into more financial independence and change how we work without feeling like we weren’t keeping up with everybody else around us. It was interesting because my kids actually were the first ones to spot the difference. They noticed that our Toyota was now a high-end vehicle. In our previous near neighbourhood, we’d see Mercedes and Audis and Beamers and the occasional Bentley when we were out and about. And every once in a while, a garage door would open up and swallow one of the vehicles and that’d be kind of what you’d see people driving around.
Whereas now, in our new neighbourhood, everyone has a car or truck that’s parked too often in their driveway because their garage is filled up with all their bikes and their camping gear. So, we don’t feel like we’re not keeping up with those around us, that comparison, we’re fitting right in with it. There’s actually some important data that goes to actually back up that move. And there was a large US study of census data, where they looked at neighbourhoods and incomes and related that to happiness. They found that the people that were the happiest, the immediate neighbourhood they lived in was wealthy, but they were surrounded by a poorer county.24 And that was actually the biggest, most powerful determinant. So, the inference there is that you want to have a secure, immediate neighbourhood, but you regularly hobnob with those that have less money than you for comparison.
[00:20:29] BF: Hearing you tell the personal anecdote is super powerful. Okay, so before we extract the money scope from this topic, let’s do a quick recap of what we found. The ultimate objective of financial planning is living a good life, which is subjective, as we’ve said, and has to be identified by each individual. It’ll be different for everyone. Our instincts, our elephants, in the analogy, push us toward behaviours that may not align with what is best for us in the long run. We instinctively want to seek pleasure, avoid pain, and compare favourably to the people around us. And we often overestimate the future happiness impact of changing our circumstances. But there are ways to persistently improve our happiness through, that we can use to build some intuition around good long-term decision-making that aligns with living a good life.
[00:21:16] MS: Yes, I think one of the big takeaways for me is that our intentional activities can have an impact on our happiness, and our circumstances that we’re in is actually a relatively small impact because we adapt to that. The big question then is which intentional activities should be focused on. From the PERMA model, we know that enjoying your daily activities, and positive emotion is important, so as being engaged, having strong relationships, finding meaning, and accomplishing important goals. Then, from the regret angle, regrets are often about not building a stable foundation when we’re younger, whether that applies to money, or health, or anything else, and it compounds over time. Playing it safe, instead of taking a risk, we can regret if we act immorally. Or if we let our relationships slip. So, it’s kind of the photographic negative of a good life. But we can use that as a way to try to steer ourselves in a better direction.
[00:22:05] BF: It’s nice to say all this stuff, not always easy to act on it. Because there are all these common traps that we just finished going through. Doing and caught up spending all their time working to earn more to keep up with their spending, not realizing that they’re losing time with their families, and putting themselves in ab increasingly precarious situation. That’s the earning and spending trap that you’ve identified, Mark.
[00:22:25] MS: Yes, I think related to that people get caught thinking more money will make them happier. But we’ve shown that’s probably not necessarily true, and comparison is a big trap. There’s always going to be someone with a nicer car, a bigger house, fancier vacation. I mean, at work, there’s always going to be the colleague that gets more OR time or has a sweet alternate funding plan, or better access to the endoscopy suite. Speaking of which, I see that the Versed is wearing off, and we kind of pushed the scope in pretty far to get all this diagnostic information that we needed. I’m going to pull that scope out, and we can plan for the next procedure. This episode, we’ve described factors to diagnose the good life, and we describe common themes at a population level, common traps for individuals. But it is individual and we just wanted to leave you with some personal questions to ponder before our next episode, when we planned about the therapeutic money scope. So, Ben’s got a bunch of questions here.
[00:23:17] BF: I’ll read a couple, Mark, and then you can read a couple. These are questions that we just want you to ponder. Have you made a major purchase expecting it to increase your happiness? Did it upon reflection? How well did the purchase align with your core values? That’s one question. The next one is, have your values and preferences changed in the last decade? Do you expect them to change again in the next decade?
[00:23:40] MS: What is your biggest regret in each of those four categories? Foundational, boldness, moral connection? What were the forces beyond your control that caused them? And what can or should you do differently, moving forward to avoid a repeat of that? How much time at work is required for your sense of work and purpose, and your work-related identity? That’s a good anchor to have when you’re considering it, your work. And how much time at home is required for your sense of community, or family purpose and identity? And how much did those two aspects match up with your current schedule? So, understanding your work purpose and identity, and your whole purpose and identity. Then, where’s that now compared to where you want it to be?
[00:24:24] BF: Great questions to think about. So, we’ll leave you with that and we’ll see you again in the next episode.
