Buying Happiness: Part 2

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Miss me? Things have been a little hectic again. But don't worry, I won't leave you out in the cold.

For some reason, I started to receive "Women's Health" in the mail. I didn't subscribe to it and I don't know of anybody that sent it to me. The October and November 2010 issues just showed up in the mailbox last weekend.

No complaints from me as there are some pretty entertaining articles and random facts within their pages. For example, did you know that hidden fiber in foods might be causing belly bloating? "Food companies are spiking everything with inulin, a type of fiber made from chicory root that brings down the fat content. Aim to get most of your fiber from fruits, veggies, whole grains, nuts, and legumes," says Joanne Slavin, R.D., of the University of Minnesota at St. Paul.

Anyways, the November 2010 issue had an article entitled "Mad Money." The basic premise of the article is that money can make people do crazy things, especially large sums of money. Literally. Studies have shown that people hate parting with money much more than they enjoy gaining an equal amount. The phenomenon, called loss aversion, was first recognized by two psychologists from the Hebrew University of Jerusalem in 1979.

Fear and anxiety cause a part of the brain to react to adverse situations, like plummeting stock prices. Think of the "fight-or-flight response."  This impulse can cause you to make snap decisions since your brain is trying to protect you. So how does this affect your portfolio? Most people are wired to avoid loss, so this reaction tends to make us bad investors. Instead of holding onto stocks during temporary market fluctuations, people will sell the winners and hold on to the losers. Why? "Because admitting the loss hurts too much," says Jason Zweig, author of Your Money & Your Brain. So buy low, sell high, and cut your losses on the duds. Easier said than done, but at least think twice before making rash decisions that could seriously impact your financial health.

That's interesting enough, but I think the best parts of the article discussed how to handle money. And it brought up many points that relate to my first "Buying Happiness" post.

"Where money is concerned, people tend to do two things over and over", says Barry Schwartz, author of The Paradox of Choice. "First, we adapt to how much money we have. Second, we compare ourselves with others. Chances are, if you make an irrational decision about money, one or both of those factors are in play." So what do you do when you get a raise or a bonus? Instead of increasing spending, create an automatic transfer that moves the increase in pay from checking to savings or investing. When you make savings automatic, you won't even miss the additional money. You'll actually have more to use down the line. Or use those funds to pay off your student loan, car, or mortgage a little sooner.

And here's a consideration for those looking to win the lottery or become the next billionaire. A Roper study conducted for Jean Chatzky's book The Ten Commandments of Financial Happiness revealed that what you need to feel happy is enough cash to live comfortably—not lavishly, just comfortably. More money than that won't buy more happiness. "Understand this," says Bert Whitehead, author of Why Smart People Do Stupid Things with Money, "and you can quite possibly control your brain and avoid nutty behavior. The true definition of financial independence is knowing how much is enough."

Brilliant! And quite timely since it's almost Thanksgiving. I take my financial independence for granted at times, so it's good to hear this reminder. I'm definitely thankful for our jobs that help put a roof over our heads, food on the table, and warm clothes on our bodies.
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