Why An Increasing Lifestyle Can Actually Reduce Your Happiness

We read a fair bit in this community about the concept of Hedonic Adaptation.  It is usually invoked in discussing whether we should allow our lifestyle to “move up” as we increase our income.  We have probably all fallen victim to this, and if you have not, you know someone who has.  They get hired making $50k/year and perhaps struggle a bit to pay their way through life.  They usually find a balance if they try hard enough and come to a place where they can live comfortably on their pay. 

Then something good happens.  They get a raise or a bonus and suddenly find themselves in the unusual position of having more money than they are used to.  So, they look to buy a better car, or a bigger house and then ultimately find themselves in the same place as before.  Now they are making $75k and still struggling to make ends meet because of the additional burden they have placed upon their own shoulders.  At first they are happier because their new car is shiny and they are getting oohs and ahhs from their friends and colleagues.  Or their family is impressed by the new, bigger house they are living in now.  But those feelings ultimately fade, and they are left with the same heavy feeling of struggling day-to-day under the weight of their obligations.

Sound familiar?  It does to me.  It is exactly what my wife and I struggled with early in our marriage.  I was a newly minted lawyer and we struggled under the weight of our student loans, car payment, credit card debt (accumulated because of the lifestyle we “deserved”), and rent.  As I made more money we started moving our lifestyle upward until one day it dawned on us that we were being trapped by our success and we shifted gears (this was before easy internet access, so we did not have the benefit of the FIRE community’s collective wisdom). 

We paid off our debts, stopped using credit cards as a crutch and lived with our cars for years instead of trading up to better models every few years.  In reading that back I made it sound like there was some sort of instant epiphany, that the light bulb somehow magically went off in our heads and we suddenly were wiser.  That wasn’t it at all.  It was a gradual thing, over a couple of years that came to a head one day when one of our credit cards that we had consolidated a good bit of debt on (probably around $50,000), decided to double our monthly payment, not our interest rate, just the payment.  It happened at a time when I had just gotten a raise, so paying the increased amount was not a hardship, but it was a wake up call.  We realized that we had, without thinking about it, placed our financial security in the hands of a bank that did not give a shit about us.  It forced us to rethink our position and to create an action plan based upon what we had been realizing over the previous couple of years.  We took it seriously and paid off about $250,000 in debt in about 5 years.  It was not easy, in fact it was painful, but it had to happen.  It was the end of our Hedonic Adaptation cycle.  We had stepped off of the treadmill.

The concept of adaptation is a good and natural one.  We humans are especially good at adapting to changing circumstances.  It’s one of the reasons that we are still here as a species.  Where it gets us into trouble is when we start voluntarily adapting to increasingly pleasurable circumstances.  The more pleasure we have the more we want and the more used to it we get.  The more we get used to it, the less pleasure we get out of each additional unit of whatever is giving us this pleasure.  So we have to have more and more to get the same happy feeling.  If it sounds like the addiction cycle, it’s because it kind of is.

In economics, there is the concept called “marginal utility” defined as:  “the additional satisfaction a consumer gains by consuming one more unit of a good or service”  [hat tip to Investopedia].  Think of it like this: You are really hungry.  You have a bushel of apples in front of you.  You eat an apple.  It is wonderful, because apples are awesome, but also because you are really hungry.  But after eating the apple, you are still hungry, so you eat another one.  It’s still good, but maybe not as great as that first apple.  We’ve all been there.  It’s because the need for the second apple, and the third and so on, is not as great as it was with apple number one, so the pleasure, or marginal utility you get from each additional apple is less and less as you eat.

This same concept applies to the increasing lifestyle characterized by the idea of Hedonic Adaptation.  To use the example above, one achieves a satisfied state with an income of $50,000.  When presented with an increased income of $75,000, spending the additional money to “upgrade” their lifestyle is not as satisfying as they thought because they were starting from an already satisfied state.  When their income rises to $100,000, and they again upgrade houses/cars/whatever, the increased enjoyment will be even less.  At some point, no amount of spending will bring any more enjoyment, in fact it may actually decrease enjoyment (taking care of stuff is time consuming and brings its own set of concerns).

It is weird, and perhaps a bit hard to fathom, that having more money can actually make you less happy, but it is true.  I see it all the time in colleagues and clients who have worked hard to become wealthy, but cannot enjoy the wealth because the happiness it brings them has reached the zero level of marginal utility.  They keep working, keep accumulating, but it brings them no happiness.  Often this leads to them seek pleasure in other, sometimes more destructive ways.  Something that could have been totally avoided if they had never stepped on the Hedonic Adaptation treadmill in the first place, rather, accumulated their wealth with purpose and an understanding of what they were doing and why.

The obvious answer is to avoid this cycle.  Use increased income to reduce debt, then invest to the point where you have passive income equal to the amount it takes to satisfy your needs.  Then, my friends, you have achieved Financial Independence.  The mystical and much discussed “FI” in FIRE.  The RE portion of the program then becomes a possibility (provided you are not already an Oldster, in which case it is just “R”).

Until Next Time, FIRE On! – Oldster

p.s. if this concept sounds familiar, it is taken from the Greek philosophy of Stoicism.  For more look for William Irvine’s book on this page.