How much money is enough is a question that has boggled just about everyone on the planet for centuries.
Perhaps my favourite story about this topic is about a billionaire’s party on Shelter Island where renowned author Kurt Vonnegut was in attendance. He mentioned to his friend Joseph Heller that their hedge fund manager host made more money in a day than his famous novel Catch-22 ever had. Heller responded that he had something much more precious – that their host would never have – “enough.”
This story is the opening of Vanguard Investments’ John Bogel’s work “Enough: True Measures of Money, Business, and Life.”
I first heard it at University College London when, just a few weeks into my first job after graduating there, former Google Chief Financial Officer Patrick Pichette gave a packed talk to an audience full of eager young people from around the world.
UCL is on a par with Oxford and Cambridge in terms of UK university status, and Pichette took this moment to tell these students not so much about his consulting career or period at the helm of one of the world’s biggest companies in its most transformative period, but to talk about life outside of work.
He delighted over the process of backpacking through South America and boasted about the few essential items needed to enjoy the world that he packed, far from his luxurious Silicon Valley lifestyle at home. I think he even tweeted the image when we was about to set out. A kind of brag of his superiour minimalism in rejection of his wealth.
This is all rich – quite literally – for someone whose earnings were more than $5 million at Google.
It was more the talk of fellow backpacking students who would exchange travel stories in an ever-escalating battle of worthiness. Meanwhile I had just started an entry-level job at an insurance company and was trying to keep a roof over my head – that roof being several floors up from my basement room with one window that I shared with my partner.
But the message still hit home. Even this very wealthy man derived true value from things that were totally irrelevant to his bank account.
He certainly gained a lot of press coverage when he made his exit from Google to travel the world with commentators praising his escape from the office, albeit with more cash than most of us can ever dream of.
To the lecture theatre he explained how he made the decision to leave when climbing mountains with his wife, who suggested at the top of one mountain that they should go on to the next one, but it was time for him to go home and get back to work.
When I saw Patrick Pichette, he was over whatever crisis or realisation had inspired his world journey and had started a new venture capital firm. But he emphasised that what he values in business now is not pure profit, but social impact and the ability to positively affect the lives of people around the world.
How much money is enough to live?
Now that may be a beautiful story, but it isn’t much use to those of us who have yet to earn millions and don’t even know if we want millions.
Afterall, many coaches and philosophers refer back to how the specific ask is much more effective than the vague wish. How much money do you need to earn to be happy?
Well without getting into much philosophy, there really is quite a fixed statistical answer to how much money is enough. It’s about $75,000.
A lot of skilled workers will likely hit that. In the US the average household income is about $56,500 so an extra 25% above the average is reasonable.
Why such a precise figure? Lots of research has been done on the profound question of how much money is enough and the results are quite consistent.
Once you have enough money to cover your basic costs and be comfortable, a larger salary increase is required for a fairly small increase in satisfaction.
Then don’t forget that higher salaries generally mean more stress and responsibility. Once you are approaching the top of the tree the trade off between salary and happiness starts to turn.
In reality, how much money is enough to live really just relies on how much you are currently spending. Lifestyle factors also come into that. If you quit your job or worked remotely you could live somewhere much cheaper. In fact if you were able to buy a property you could save massively on renting.
On the other hand, if you earn more money then you can easily suffer what is known as “lifestyle creep” where you get used to a high standard of living. Luxuries suddenly become essentials as your values are distorted and you become dependent on your wealth. Your social circles will also have a big impact on that if you end up surrounded by people fixated on status and visual displays of wealth.
The Roman stoic philosopher Seneca recommended anyone tries living in poverty for a short time both to appreciate the wealth you have but also to then realise how similar life is when poor. This is much the same concept Pichette faced backpacking through South America.
“I hold it essential, therefore, to do as I have told you in a letter that great men have often done: to reserve a few days in which we may prepare ourselves for real poverty by means of fancied poverty. There is all the more reason for doing this, because we have been steeped in luxury and regard all duties as hard and onerous”
Time and Money
Of course this kind of noble thinking makes it easy to say that money doesn’t matter. You can be happy poor. But that’s not necessarily the most productive conclusion.
It is definitely true that money doesn’t buy happiness and you should aim to achieve real happiness without relying on money.
Being content with what you have in the present, and being grateful, is truly the path to happiness.
But I would also stress the importance of generating wealth. Throughout this piece on how much money is enough we have focused on earnings. But to me a more significant focus is on assets.
It is assets that give you the freedom to buy back your most precious non-renewable resource: time. You can be content and poor, but the feeling of owning your time and safety net that provides is massive.
I don’t envy someone on a high salary for the extra drinks they can order one evening. I do envy that the money they get for their time offers a lot more opportunity for investment that could allow them to reclaim their time sooner. Of course if they suffer from lifestyle creep – such as buying drinks frivolously – then they may not be investing that money and may not be able to live on a reduced income from their assets rather than employment.
Whether its stocks, commodities, property or all sorts of other assets, it is your assets that ultimately determine how you live.
If you have no assets then you have to exchange your time for money. Your first priority once you get that money, once your expenses are covered, should be to acquire assets that will keep making you money while you sleep.
Once you realise how much money is enough for you to live on, you should work out how you can reliably get that from assets. Then not only will you have enough money, but you will also have your time to enjoy as you see fit.
This is very relevant to the question of how much money is enough to retire on. Traditionally this is worked out using the 4% rule where it is commonly believed that if you invest your capital and withdraw only 4% per year then it should last about 30 years. Therefore you should work out how much you need in order to live off 4% of that each year.
You can also account for inflation each year so you’ll budget an extra 2% the following year.
Nevertheless plenty of experts now think the 4% rule is outdated with people living longer retirements. It is also a fixed rule based on a lot of assumptions whereas the reality will depend a lot on asset allocation, plus it is unlikely that what you will need to spend will be consistent year on year.