Financial literacy is often used to describe gaining an understanding of financial products, such as investments and pensions.
The term ‘literacy’ means competence in a particular area, and when this is applied to finance, we would suggest it should relate to how we use money to make us happy. It’s like the difference between knowing how to drive a car and knowing how to get to the best beaches.
Our founder Chris Budd has been in financial planning all his life and began writing about financial wellbeing in 2015. When he googled the term then, there were 2 results in that search. Having just googled it again; now there are 255,000,000 results!
And yet the term financial wellbeing is still used by many to describe the relatively narrow (albeit important) field of budgeting and managing debt. Understanding the relationship between money and happiness goes much deeper, and might even stop someone from getting into debt in the first place.
Cost of living issues
Times are tough, and getting tougher. Budgets are coming under increasing pressure and debt is rising. One would like to think that spending habits are also changing. However, this is not always the case.
This is because we see spending as a route to happiness. This even has a name – retail therapy.
~Novel Serialisation: Heavens Fire~
If we can gain a better understanding of the true sources of wellbeing, we are likely to view how we spend our money very differently.
Financial Wellbeing Junkies
We arrive at adulthood with a set point of wellbeing (researchers believe that some 60% of our set point of wellbeing is inherited). We then shift up, down, and around that set point as we go through our lives.
Maybe something good happens to us, and we feel particularly happy (note: we use the term ‘happy’ to describe short term feelings of joy, and ‘wellbeing’ to describe longer term contentment). In time, and usually a fairly short time, we settle back down to our set point as we become accustomed to our new situation and the effect what made us feel happy wears off.
The same happens when we experience something that makes us unhappy. However, we have three times more negative thoughts every day than positive thoughts (a hangover from our ancestors who spent their day worrying about whether they were about to be eaten). Consequently, there is more pressure on getting back up to our set point of wellbeing.
One way of achieving this is to buy stuff. This is what retail therapy means; feeling a bit low, therefore buying something to give us a short term hit of happiness.
The trouble is, once that feeling wears off, we need another hit, we need more retail therapy. We become Financial Wellbeing Junkies.
If that spending has put us more into debt, we need to spend more money for more short term hits. Which increases the debt. Which makes us unhappy, and so we buy more stuff. A downward spiral, and one that advertising is designed to perpetuate.
Free Wellbeing
How do we break this cycle of spending? There are a number of studies on happiness that can help us here.
For example, we know that wellbeing from buying stuff is very short lived, but wellbeing from experiences is much longer lasting.
This is because experiences create memories, and wellbeing from memories is much longer lasting.
Some memories can be derived from how we spend money, such as going on holiday. Many memories, however, are not linked to our spending.
We have chemicals in our bodies that create happiness, such as endorphins and serotonin. These chemicals are triggered by exercise, by eating well, by spending time with loved ones, and by helping others. All of these can give you that short term hit of wellbeing to keep you up to your set point level, and do not require money.
Social Wellbeing
A long lasting study by Harvard University asked young people what they thought would bring them happiness as they went through their lives. Their response was consistent: money and fame.
The study then went back to the respondents every two years, and asked them what was actually bringing them wellbeing. They have been talking to these people for some 80 years now, (you can see the marvellous TED talk on YouTube – search Harvard Study On Happiness).
The overwhelming response to what brought them wellbeing in their lives was not money, or fame; it was the quality of their social relationships. Note, not the quantity, but the quality.
The Self-Worth Source Of Joy
If we seek our happiness from external sources, for example the approval of others, status symbols, and so on, then we will be forever chasing happiness. Once the applause dies down, we are back on that treadmill of chasing hits of wellbeing. We need instead to find a source of happiness that is endless, that doesn’t rely on other people or require money. We need to break the link between our self-worth and our net worth.
The answer comes in the form of self-worth from internal sources. If your wellbeing comes from within, you will be in control. When you are feeling low, you can turn on the self-worth tap and feel better.
Which sounds great, but what is this source of internal self-worth?
It is compassion
The joy of giving and helping others is a significant source of self-worth, and therefore a major source of wellbeing, and it is free.
Another way of putting this would be to think about what brings meaning and purpose into your life. This invariably involves helping someone else. Is this how you are spending your time, and your money?
Your Future Self
Financial wellbeing isn’t just about how you spend your money today. It is also about financial planning. In theory, this is very simple: you just work out what you want from life, then spend your money on that.
In practice, however, working out what you want from life is not so easy. Many of us struggle to put money aside for your future self. There is, however, a physical reason for this.
When you think about your future self, you use a different part of your brain than when you think about you now. In fact, the part of your brain used to think about you in the future is the same part that is used to think about other people. The further away your future self is that you are trying to imagine, the worse the situation gets.
This means that when you think about saving, you are thinking about giving money to somebody else. It’s no wonder that pensions and savings are far below what they should be!
True Financial Literacy
Understanding what makes you happy, and how money can help or hinder your wellbeing is financial wellbeing, and we would argue should be at the heart of financial literacy. Every decision you make about money should surely be aimed at supporting your long term wellbeing.
Happiness, wellbeing, joy; all of these come from spending time with loved ones, creating experiences and memories; helping others, free stuff like sunshine on the skin, exercise and healthy eating; connecting with your future self by being clear about what brings you meaning and purpose in life; and being compassionate in helping others to bring you internal self-worth.
These are the secrets to living a happy life. It’s time to make money your slave and not your master, and focus on only spending money if it brings you wellbeing.
By Chris Budd
About the author
Chris Budd is the Founder of the Institute for Financial Wellbeing – formerly the Initiative for Financial Wellbeing. Our purpose is to help financial planners, advisers and coaches improve their clients’ financial wellbeing by helping them become happier and more fulfilled, not just wealthier. This includes helping them to identify what aspects of their life they value most. In the long-term, we aim to positively influence the way the financial services industry works with clients, shifting the focus from money being the goal to money being a tool with which to attain life goals.
