Sudden money. Sometimes it’s not just a dream: a wealthy uncle passes away; you come out ahead on a real estate sale; your bonus is bigger than planned—or you earn some money in a company IPO. Now what?
Cover the basics, if you haven’t already: Pay off debt, max out retirement accounts, create a safety net fund, maybe buy a home or stash some money for an important goal (a child, a new business, etc.).
Booooorring, you say? Hang on. Your lucky break should feel lucky. But instead of getting that feeling from a big spend on an expensive one-time toy (sorry, no personal jet on the list), we have a better suggestion.
It’s called the happiness annuity.
Make yourself a little bit happier—every year
When it comes to money, research has shown that increases in happiness are linked to continuous upward spending for your lifestyle, not merely achieving a certain level of wealth. If your spend rate has been $150,000 per year for the past five years, you may end up less happy than someone who has been increasing their spend (and income) every year for the last five years to get to $150,000.
Why? If you’re in the second group, you are getting a slightly larger piece of pie each year—and that just feels good. Spending a little more than you did the year before makes you a little happier than spending at the same rate year after year. It makes you feel like there’s progress on the journey of life.
By contrast, when you rapidly spend down a bonus, gift, or windfall, you go from being flush to feeling broke—and deprived. That often happens to lottery winners who go broke after a few years. They hiked their spending to a level that was unsustainable, rather than doling out their winnings year by year, and when they have to go back to their old lifestyle, it feels lousy.
When you create a happiness annuity, you use your windfall to give yourself a raise—or a little extra to spend—every year with smart investing.
How it works
Set up an investing goal that’s specially earmarked for this purpose rather than commingle it with your other savings. This is your designated “happiness annuity.”
With this goal, the idea is to both grow your money through investing, and make withdrawals, to give yourself a 1 to 3% raise over your normal spending habits each year. (Your raise depends on how long you want that windfall to last, and how much risk you take on.)
For example, let’s say you spend $100,000 per year. A loving relative left you $500,000 in cash in an inheritance. After you’ve done all your financial housekeeping around debts and retirement for the year, you might have $400,000 left. By investing this money, you can easily use it to give yourself a 1.5% raise every year for the next 40 years.
Keep this money in an investment account with an allocation that will keep it growing at around 6% expected returns annually (around 40% stocks in a Betterment-like account).¹
Then put yourself on an annual schedule to receive your “happiness annuity.”
It starts small, but if you have the discipline to stick to the plan, by year 10 you’ll be enjoying an extra $16,000 and it keeps going up from there. By the time you’re in retirement, you’ll enjoy an extra $80,000 in disposable income.
|Year||“Happiness annuity”||Investment balance|
One last secret: The key, research shows, is to not spend your money on just anything. When you invest in experiences—vacations, classes to learn a new skill, producing a studio record, tricking out your bike, giving someone a gift—you reap the biggest happiness dividends.
And putting a smile on your own face? Priceless.
This article was published on September 20, 2013