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Financial Planning

The money vs. happiness line

Hello everyone! Poppy here again and for this month I am posing the question of 'how much money do we really need to be happy?' We should use our time in the current environment to consider what our financial goals are and how we view our personal position on the money vs. happiness line.

The money vs. happiness line


Many of us are living through very strange times at the moment. Most of the normal rules have disappeared and some of our usual day-to-day things (that we probably took for granted) are no longer possible - going for coffee or lunch with friends, visiting the cinema or theatre, travelling locally or internationally, networking with business colleagues etc.


There is more time to reflect on what has been and what may come in the future, and to decide what is really important to us after all; health, friends, family, fresh air, exercise...the less materialistic things perhaps. Maybe there is also time to decide where we are with our financial plans and how we view our 'money vs. happiness line' in this new environment.



So how much money do you really need to be happy?



One person's answer will be different to another’s, so their individual answer becomes the starting point. Many financial planning assessments start by trying to ascertain how much someone will need in X years’ time to be financially secure when they retire but without considering whether they are happy for the next Y years in earning the capital to create that retirement lifestyle.


What is the point in earning six figures per year for the next 30 years to support a rather luxurious retirement if you are going to have 30 years of unhappiness in getting there? You might be better advised to work less hard, spend less and have a lot less stress for the next 30 years and accept a more modest retirement.


Most of us have short term, medium term and long term financial goals, so let’s revisit some of the assumptions behind them.


Short term


Such as paying the mortgage or rent, this term’s school fees, any personal loans, going to a concert or a play. Short term goals are about managing finances on a week to week or month to month basis.

Key questions here: Do you need to live in a large detached house or would a much smaller place suffice? Do you have to live in the centre of London or would the suburbs suffice? Is the additional cost worthwhile i.e. does it justify the additional stress you have to endure or the extra hard work? If the answer is yes then no problem, but if you are perhaps not sure any longer then it might be time for a change.


Medium term

Like paying for this year's holidays or taking a sabbatical next year. Buying a new car. Do you need to travel halfway around the world for your holiday this year or would something more local make you just as happy? Is a new car with lots of gadgets a must or would something more modest and economically more friendly get you from A to B at the same time?


Long term

How much will I need to live comfortably when I retire and therefore when can I afford to retire? This will of course depend on how you define comfortably. What sort of accommodation do you expect to live in? Will you still require a large house once the kids have left home or will something smaller make you just as happy. How often do you wish to travel and how expensively? Will you pay for private medical care or will you be happy with the national health service? Do you plan to buy another home along the way?


All of these questions and many more determine the size of your required retirement pot and in many ways allow you to decide where you sit currently along the money vs. happiness line.


An easier way to think about this:


Short term

How much cash do I need to have in my bank account to pay for day to day transactions?

Medium term

How much do I need to put away each month towards larger items of expenditure due in the relatively near future?

Long term

How much do I need to save each month towards retirement or that large special purchase?


A traditional rule says that approximately ⅓ of monthly income should be allocated to each category. So if your short term spending is higher than ⅓, you may be living beyond your means and if your long term savings are less than a ⅓, you may be jeopardising your future retirement or at the very least you may need to plan to retire later, or build a consultancy business that can help with income and keep you mentally stimulated in the last thirty years or so of your life.



Here we use a real example:



Jacob is 30 years old with a great career and currently has a post-tax income of £10,000 per month. He is considering a number of options:


Option 1:  


Jacob will make long term savings of approximately £3,300 (that’s 1/3 of his after tax income) per month from age 30-40, rising to £5,000 per month from age 40-50 and £10,000 per month from age 50-60.

If he saves as above from age 30 and aims to retire at 65 then at an assumed growth rate of say 5% p.a. from investing his money, he will have accumulated a pot of £4.2m.

Jacob assumes he will live to 100 and that the underlying value of his invested capital when he retires in 35 years’ time will at least keep pace with inflation. This means that Jacob will be able to drawdown £140,000 p.a. before tax for around 30 years.

But how much is £140,000 p.a. in real terms in 30 years compared to what it is today?  Assuming inflation averages 3% p.a. for the next 30 years then £140,000 p.a. in 30 years is worth approximately £57,000 p.a. today.

This is rather disappointing isn’t it? After decades of hard work in a well-paid job, and a seemingly large retirement pot of £4.2m, his retirement income is less than what he is spending at age 30.  



What if we change some of the assumptions?


Option 2:


Jacob will opt for a simpler life, only spends ½ of his monthly income. In this case 50% of his current income after tax goes into his retirement pot, allowing him to retire earlier at age 59 with the same sized assets, distributing the same level of income as in option 1; i.e. he makes more sacrifices today in exchange of an earlier retirement, while sustaining his lifestyle and spending.


Option 3:


Jacob settles for a simpler life in retirement, expecting that he can live off less income, possibly supplemented with consultancy revenue when required but aiming to change direction at age 50 and dedicate his life to working as a volunteer at a wildlife foundation.



At Rosecut, we can help you with your financial modelling through the lifetime cash flow projection on our website and with one-to-one meetings over Zoom. We can also help you decide just where you sit on the money vs. happiness line and what that means for the financial decisions you should make today.



We know that after an economic shock caused by a health crisis less spending has a negative impact on the recovery, but equally important is that we have a healthy reflection on our relationships with money including the objects of desire that money can buy and not fall into the traps of consumerism if we chose not to.



If you enjoyed reading this, you might also like our other business insights here.


As ever, please remember: Past Performance is not a reliable indicator of future returns. When investing, the value of your investment may rise or fall and there are no guarantees you will get back all the capital you have invested.

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