Chris West, CPA, PFS
Grandma would always tell us kids to “save some money for a rainy day.” Grandma was always very wise in many matters, and being wise with money was no exception. Essentially, Grandma was referring to the three foundational behaviors of building wealth, which are: 1) create excess cash flow by living below your means, 2) embrace risk and put the excess cash flow to work (i.e., invest), and 3) have a long-term mindset versus thinking short-term “get rich quick.” Without these three behaviors, the wealth-building journey will lead you over a bridge to nowhere.
Of course, the wealth-building journey can take many different twists and turns and involve various complexities, such as choosing amongst various investment vehicles, determining the types of investment accounts to set up, strategizing the payoff of a mortgage, and crafting an estate plan. But, at its core, the wealth journey begins and ends with the first foundational behavior of: Live Below Your Means! Like a heartbeat, this behavior is the constant rhythm pumping lifeblood throughout the wealth-building journey. Living below your means embodies the mindset of continuously telling yourself, “I would rather be wealthy than look rich.”
I was recently inspired by the teachings of Arthur Brooks, Harvard professor and author of the book, Build the Life You Want. Brooks has a wonderful way of explaining the science of happiness. According to Brooks, there are three ingredients to happiness. The first ingredient is Meaning, which, at its core, implies acknowledging that things happen for a reason and that our lives do, in fact, matter. In other words, we are all alive in order to do something purposeful on this earth. The second ingredient is Enjoyment, which means finding pleasure in sharing experiences with people you care about and being actively present and engaged in the experience. The third ingredient is Satisfaction, which is what I would like to talk about for the remainder of this article, specifically how satisfaction ties to the all-important wealth-building behavior of living below your means.
As highly complex human beings, our brains have developed a naturally evolved tendency to want to rise through the hierarchical tiers of society. This explains why all of us, certainly me included, have moments of consumption “flexing” when buying a fancier car or upgrading to a bigger hotel room. So, let’s apply some math to this discussion. Brooks proposes there are three formulas that explain both our impulses and the reason we can’t ever seem to achieve lasting satisfaction. The first formula: Satisfaction = continually getting what you want. Of course, we always feel some brief moment of satisfaction when we get what we want, but the moment quickly fades, and in order to get back to satisfaction, we have to keep running and running and pushing and pushing to get what we want again, and again, and again. The second formula: Success = continually having more than others. As humans, we quickly realize that continuously getting what we want, while providing some amount of satisfaction, is truly not leading to success. Why? Because someone else is getting more than me. So, our brains then derive the third formula: Failure = having less.
These three formulas adequately describe why it is so hard to achieve lasting satisfaction. I guess The Rolling Stones summed it up best in their 1965 hit song “(I Can’t Get No) Satisfaction.” I can already hear Mick Jagger singing the lyrics, “Cause I try and I try and I try and I try.”
So, how can we apply better math? Brooks proposes we throw out the previous three formulas and follow this one formula: Satisfaction = what you have/what you want. Stop and think about this and notice the difference from the previous formulas. It’s powerful to think about satisfaction as a fraction where the numerator is what you have and the denominator is what you want. All of our human biology wants to focus on the numerator of our haves. However, this ignores the denominator of the equation. If we increase our haves without managing our wants, our wants will grow rapidly and sprawl out of control, thus lowering satisfaction. In this day and age of a consumer-driven society, we are constantly bombarded with clever marketing campaigns designed to make our wants explode without even realizing it.
Let’s tie this back into personal finance. Managing our wants allows us to execute successfully on the key foundational behavior of living below our means. Please understand me correctly. I believe very strongly in the importance of living life with an abundant mindset versus approaching every money decision with a miser mentality. It all comes down to having balance and working the satisfaction formula by increasing our haves but being mindful about managing our wants. There are only five things we can do with our money:
- Buy experiences. For example, spending money on a beach vacation with the family.
- Buy time. For example, pay someone to mow your lawn and then spend the freed-up time doing something meaningful.
- Give it away. For example, set up a scholarship fund with your alma mater.
- Save and invest. For example, contribute the maximum amount to your 401(k).
- Buy Stuff. For example, buy that 5th Rolex watch.
The first four on the list will bring satisfaction and thus a happier life. However, our brains are continuously telling us to do the one thing on the list that won’t bring lasting satisfaction – buy stuff! Furthermore, one of the biggest satisfaction generators involving money is number four – save and invest. The reason is because we as human beings are designed to make progress. We get the most satisfaction from making progress towards a goal versus actually arriving at the goal.
Grandma, we hear you! Controlling our wants allows us to live below our means which allows for saving and investing for a big beautiful tomorrow. The result: Satisfaction on our wealth journey is increased.
Wishing you all the best on your personal wealth-building journey!
Christopher L. West, CPA, PFS, is CEO and a Principal of DWC CPAs and Advisors and DWC Wealth Advisors. During his public accounting career as a tax professional and advisor, Chris specialized in mergers and acquisitions, real estate advisory, cost segregation studies, small business taxation, and estate planning and income tax planning for high net-worth individuals. His passion is helping others find fulfillment and their definition of success in their wealth journey. He is a licensed Certified Public Accountant, Personal Financial Specialist, and is a series 65 investment advisor representative with Global Retirement Partners, LLC. Chris graduated with a Bachelor of Science in Accounting from Colorado Mesa University, Grand Junction. Investment advisory services offered through Global Retirement Partners, LLC (GRP) dba DWC Wealth Advisors, an SEC registered investment advisor. GRP and DWC CPAs and Advisors are separate and unaffiliated entities.
