Money, Freedom and the Art of Happy Living

Did these guys need a TV? (seen at the amazing ancient greek city of Ephesus, today in Turkey)

Woodpecker's last TV

Do you remember these bulky huge TVs, one bought in 90s?

Big as a wardrobe and energy-consuming in a way you could heat your flat with them?

That was the last TV I owned.

I don't know how many hours I spend in front of it...
...until finally it broke down in 2004.

I was going to let it be repaired, but it was Mrs.Woodpecker (Mrs.Woodpecker in spe at that time), who voted for putting it away in the basement for some time, as she felt that she could not control her TV consumption.
Because of that she was one of the few persons who never possessed a TV, until we moved together some years before.

So the TV set went to the basement, and guess what:

I missed it terribly the first week
I missed it a lot the second week.
I missed it a little the third week.
I had forgotten about it the fourth week.
And I was glad like hell to have gotten rid of it from the fifth week on until....

...continue reading at my main blog.....

Today, let's start to save some money.

Saving per se is a thing many people don't like to think about, because it means to surrender some consumption.

So let's look at some tricks that helped me saving and might help you as well:

1. Understand the economic concept of opportunity costs
   
   This concept basically says that you can spend each Euro only once.
   So you should not look too much on the price of something, but you should look at the utility (or happiness) it gives you compared to other products with similar price.
   
   Example:
   When you are about to buy something (let's say a dinner at a restaurant), don't say "well, that's 20 EUR, this is a good price so I buy it", but think what you could do with the 15 EUR instead. Think about something you like very much (let's say watching films) and compare (my meal in the restaurant equals buying 2 DVDs, or renting out 7 DVDs). And now decide: Buy only if the comparison seems worthwhile. If not, this good is not attractively priced for you (might be different for somebody else).


2. Calculate in yearly savings and imagine what you can do with the saved money
   
   Often people are too lazy to optimize e.g. their electricity provider, because the hassle involved seems to be big (compare offers, find a better one, cancel the old contract, set up a new one) and the reward seems to be small, e.g. a couple of Euros per month only.
   What helps is to think in (a) yearly savings, (b) the hourly pay for your effort and (c) what you could do with the savings each year:
   E.g. if changing your electricity provider saves 9 EUR per month this might not seem to much and not worth the effort if it takes let's say 3 hours work to switch.
   But in 1 year this is 108 EUR. In 5 years this is 540 EUR.
   Different picture.
   
   Continue reading in my main blog!

(Well, some spare money is not that bad, 'cause it can bring you here. But how much do you really need?)

In the last post, we discussed the mistakes many people make around the role of money in their lives.

Let’s start with mistake 1:

It is not money one must maximize in life, but happiness.

Money sure is one good means to acquire happiness, by allowing consumption, travel, free time etc. But generating money also costs happiness by getting stressed, having no time for friends and family, fearing of losing it etc.
So we have to look at the whole bundle: How much money can I easily generate without sacrificing too much happiness?!
How can I create happiness without any costs at all?
How do I balance creation of happiness and creation of money?
What really does make me happy?

Then there is mistake 2:

Ever more money is not making you ever more happy.

This is not some esoteric coming from my mind and I sure would not decline a lottery win (though I would be careful whom to tell) but it is scientifically proven, by a relatively new and very thrilling branch of economics, called economics of happiness. These guys go back to the roots of mistake 1 and ask:

What does make people happy?

You can google it and later I will add some further reading, but here is in essence what they say about happiness and income:

• Income matters to a certain degree. If you have a very low income, improving your income improves happiness.
• From a certain level on income does not matter anymore. More income will then boost your happiness for a short time only (ca. 3 months), then your happiness level returns to where it was before.
  If you ever notices that a pay-raise gave you a kick for a short time only and after some time you thought:”Well that was nice, but now a bit more again would be adequate” – then you are already about the threshold. In economic terms then your situation is: Your long-term additional happiness from additional money is zero.
• Same holds for consumption, the kick from consumption is only short. While a new car is really great in the first months (yeah, I know, I bought a fairly new one last year!), the joy of riding it declines steadily until ½ a year later your daily commuting is as annoying as before. (…Was the same for me unfortunately.) But then, the money is gone, so spend it carefully!
• Your relative income matters more than your absolute income.
  This means if you live in a medium neighborhood you will feel more happy with your income than if you move to a posh area with the same income.
  In other words: We always compare ourselves to others. So be careful whom you spend time with. Don’t wish to quickly to enter the hip “sex and the city”-society, as you might feel quite miserable there.
• Changes in income are what you recognize more than it's actual level.
  This it similar to what I wrote before. It sounds contra-intuitive, but in terms of happiness its much better to start on a low level, and slowly but constantly move up, instead of being born rich or to win the jackpot that catapults you among the rich.

There is much more to learn from the economics of happiness, e.g. how does TV influence your happiness? How does education or children, or free time or being married?

But let’s stop for the moment, as I really need some idling now… ;)
Come to than in a later post…

Cheers,
woodpecker

	Woao, this is a hell of a title for a post, isn’t it? Maybe a bit too big shoes to walk in? Maybe, but however, I just had no other idea to introduce what I am trying to write: What the hell are the important things in life? Well, lets start out with a bit of economic theory:
(First one to tell my the title of the book referred to gets a free guest post!)

Background: I turned to economics some years ago to learn better how to live a good life. I learned a lot there, and certainly improved massively in handling my money and better understand economic affairs (happy to share this if anyone requests), but no, they could not help me with the way to live your life. Reason is that modern economics is really on the wrong path (they are starting to understand that only slowly).

However, what does economic theory say?

The part of economic theory that’s dealing with the individual is called Microeconomics, in contrast to Macroeconomics.

(The first one to eat 5 of those gets...well, nothing. Stupid enough.)

Classical (more that 100 year old) Microeconomics measure everything you do in so called “utility” (=well being or “Nutzen” in German), meaning the “utility” you derive from certain actions or consumption. Basic utility theory comprises things like decreasing marginal utility (e.g. the first burger gives you a lot of utility if you are hungry, the second a bit less, and the 5th probably no more additional utility at all…well, probably – I don’t know your eating habits though…).

This is a fairly vague concept but it makes a lot of sense and is worth studying.
Problem is that it’s difficult to measure utility. But economic mainstream since the 90s somehow lost track of common sense and one of the results were that very often utility was set equal to money, and economic output or GDP became the measure for “successful politics”.

This is the first mistake regarding the value of money:

Many people (and politicians and consultants and managers) think that maximizing money equals having a good life.

This is incorrect. Correct would be:

Happiness is key…
…and therefore the amount of happy (or content =”Zufriedenheit”, as always happy seems unrealistic) time that you spend in your life. No matter where the happiness or contentment comes from, be it consumption, hanging out, listening to good music, having sex, travelling or just starring at a wall…whatever you like.

The second mistake regarding the value of money

The second mistake is that most people, and surprisingly many economists as well, forget about the above mentioned law of decreasing marginal utility.

Thus they incorrectly assume that a lot more money will give them a much better life.

Correct would be:

Money is not bad, but it comes with a cost.

Thus is depends if more money (and the associated costs) is better or if the effort to obtain that money is to high, so that you'd rather sty with less.
This sounds easy and logically, yet it ist surprising how often this fact is ignored by people when they are dealing with money.
And one must be very careful not to fall in the "more money is always better"-trap as well.

We will discuss this in post #6.