Are You Financially Happy?

January 16. 2018

“Clap along if you feel like happiness is the truth…”

Do you know the song? It was released in 2013 by Pharrell Williams. It came to my attention as a result of an article that focused on how this popular song had very different effects on its listeners. Apparently, on hearing the words, some people would feel angry, or even sad. I am certainly no life coach but I understand that life is not always happy. I believe one sign of maturity is the recognition that even a “happy person” has both ups and downs. We should probably be grateful that we do not stay in a state of perpetual pleasure, or perpetual despair.

The concept of happiness can also be applied to our finances. For many people financial happiness is based upon having enough money for their desired quality of life over their remaining years, with some cushion to provide reassurance. If we could quantify this simple definition of financial happiness, we could call this amount of money our Financially Happy Number.

These simple ideas seem to have relevance given current valuations in the equity markets. If we had a million dollars of value invested in the broad US equity markets in October, 2007, and continued to re-invest dividends, we would likely have reached a state of despair by March, 2009 when the steep market decline would have reduced our value to $460,000, a drop of 54%. If we had resisted the temptation to give way to depression, and selling out, our investment would have recovered to the joyful level of approximately $2,200,000 today.

In theory, the current strong market should have taken every equity investor closer to their Financially Happy Number. Our hypothetical $2,200,000 might be too low for some, but the numbers can be adjusted for each person’s situation.

So, what is your Financially Happy Number? Most people under 60 will feel they are not there yet, and will need to continue to work. From a purely financial perspective (there are other reasons to work after all) the calculation of how many more years of earning income are required will depend on establishing a goal, knowing how much income can be saved, and investing available funds intelligently.

If you are in the position where you have already surpassed your Financially Happy Number, this might be a good time to review your portfolio and, while continuing to invest intelligently, consider strategies that will help preserve and protect that Financially Happy Number against a downfall. Putting in place such protection will help you deal with a market down turn, and reduce the chance of feeling that you are not in control.

Although quantifying a precise Financially Happy Number is probably unrealistic, we can help you evaluate whether you have reached the level of financial wealth when preservation becomes the main driver of your strategy. In fact, crafting, developing, and then protecting some broad estimate of a Financially Happy Number should likely be a core part of everybody’s planning process.

Lloyd Flood