How much is enough?

How much is enough?

It's one of the most important questions in personal finance, and also one of the hardest to answer. Financial planner and writer Carl Richards has spent much of his career helping people strike the right balance between saving and investing on one hand, and spending and enjoying life on the other. We're all different, so the answer is different for each of us, but there's one fundamental question, he says, that everybody needs to confront.

In this video, Carl Richards explains why so many financial challenges, whether not saving enough or spending too much, come down to a single concept: defining what "enough" means for you, and getting comfortable with it. The difficulty is that nobody can hand you the answer. No one else can tell you whether to spend on a weekend away with your family now or save that money in case you need it thirty years from now. A good financial planner can help you think it through, but ultimately only you can decide where your true priorities lie.

You'll learn Carl Richards' practical approach: do the spreadsheet, because the numbers matter enormously, but then step away from it, get quiet, and honestly ask yourself which choice is more valuable to you. Sometimes you'll decide an experience today matters more; sometimes you'll decide securing your future comes first. Both answers can be right. He also shares a rule he applies in his own life, backed by academic evidence: prioritise spending on experiences, like holidays and adventures, over physical possessions, because experiences reliably bring more lasting happiness than things.

The video also explores why we so often get this wrong, from our weak emotional connection to our future selves (research suggests we relate to ourselves in 20 years much as we would a stranger) to the hedonic treadmill, the way the thrill of buying something new quickly fades. As Carl Richards puts it, just as with the 47th bite of ice cream, there's decreasing marginal benefit to more stuff, and more income, unless we're truly clear about how we're using it.

The takeaway: in the end, only you can decide what to spend your money on and what "enough" looks like for you. If you haven't done it already, there's no better time than now to work out exactly what your real priorities in life are.

Chapters / Key points

• Why "how much is enough?" is such a crucial question
• Balancing saving and investing against spending and enjoying life
• Why defining your own "enough" is the key concept
• Why no one else can give you the answer
• Carl Richards' method: do the spreadsheet, then get quiet
• Why experiences bring more happiness than possessions
• Why we struggle to connect with our future selves
• The hedonic treadmill and decreasing marginal utility
• Why working out your true priorities matters now

Transcript

How much is enough?

RP: Financial planner and writer Carl Richards has spent much of his career helping people to strike the right balance between saving and investing on the one hand, and spending on the other. We're all different, and the answer will be different for each of us. But there is, he says, a fundamental question we all need to ask ourselves.

CR: Whether it's not saving enough or spending too much, they're both challenges. Most of them come down to one simple concept, and that is defining what enough is, right, getting comfortable with your enough. And that's part of the problem here, is that there's nobody who can tell you the answer, right? There's nobody who can tell you the answer, should you spend on this weekend trip with the family, or should you save that because you might need it 30 years from now?

RP: These are all issues that a good financial planner can help you with. Ultimately, though, only you can decide where your true priorities lie.

CR: So you do the spreadsheet, important, incredibly important, and then you kind of tear it up, and you do your sun salutations, or your yoga, and you go on your morning walk, whatever you do to get quiet, and say, "Which one is more valuable to me?" Because you're the only one who will know that answer. And I think that will get you closer to "enough." Sometimes you'll say, "You know what, that experience isn't as important as making sure we have some money 20 years from now." And sometimes you'll say, "Right now our family really needs this." And both of those times, you'll be right.

RP: A rule that Carl applies in his own life is to prioritise spending on experiences, like holidays and adventures, over spending on physical possessions. It's advice that's backed up by academic evidence.

CR: The research is pretty clear: experiences bring more happiness than stuff, right? And those experiences include experiences today, and they include experiences 20 years from now. And some of those experiences far off, 20 years from now, you have a hard time even imagining, because the research is also clear: when we think about ourselves 20 years in the future, we have the same emotional connection as we do a stranger.

RP: Something else to bear in mind when you're tempted to buy a new car or the latest smartphone is what behavioural scientists call the hedonic treadmill. Basically, the thrill we experience from buying things soon wears off.

CR: The point is, at a certain level, and this is true with ice cream, this is true with chocolate chip cookies, it's true with running, it's true with everything, at a certain level there is decreasing marginal utility, right? The added benefit for one more bite of ice cream, when you go for bite one, that's the best. Bite two is really awesome. You get to bite 47, and it's actually getting worse. And it's the same thing with income, unless we're really clear with how we're using it, just earning more is not going to make you any happier.

RP: Again, in the end, only you can decide what to spend your money on. And if you haven't done this already, there's no time like the present to figure out exactly what your priorities in life really are.