Jan. 4, 2023

Money, Friendships, and Quality of Life: Spending on “High ROI” Activities & Experiences

Money, Friendships, and Quality of Life: Spending on “High ROI” Activities & Experiences

Happiness is worth investing in.


This episode was inspired by a conversation I had with two other financial talking heads about how backward it is to strip your life of all joy in the pursuit of saving every penny: “I’m not sure what they’re optimizing their lives for,” one said, “But it obviously isn’t ‘happiness.’”

Friends, I plunked down in the chair after that and wrote for three hours straight (then decided I hated the first draft and basically rewrote the entire thing)—and the result was this episode.

Take a trip with me to the fictional town of Ramseyville (I’m the HOA president, in this analogy) and let’s explore the ways in which the road to hell is paved with good intentions.

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Transcripts can be found at podcast.moneywithkatie.com.

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Transcript

Katie: What's more important, money or people? My guess is you probably thought “people,” duh—but today I wanna explore the way in which we humans tend to get this seemingly obvious cost/benefit analysis wrong a lot of the time. Not because we are selfish or greedy or doing anything wrong, but in many cases for the opposite reason: because we're trying to be responsible. 

Welcome back to The Money with Katie Show, Rich Humans. I am your host, Katie Gatti Tassin. And today I want to pose a question: What's more important, your money or your relationships?

Now, we know money is very important because it's a proxy for the magnitude of your choices—how you spend your time, who you spend it with, and the quality of life that you're able to live—often determined fully or in part by how much money you have access to. There are few elements of your life that are gonna have a wider-reaching impact than how much money you have. Now, despite recognizing how important money is, we have to reconcile, to balance that fact with the truth that it's actually not the most important thing. Relationships, your friendships, your family, the people in your life, are more valuable than money. Seems obvious, right? So the answer to this question deserves unpacking, because money is complicated, but not in the confusing “investment accounts and asset allocation” ways people think it's complicated. Becoming financially savvy is usually a matter of becoming adept at running constant cost/benefit analyses, which we humans tend to get wrong without even realizing it. 

Here at The Money with Katie Show, we believe in optimizing life for fulfillment and joy, not going six feet under with the largest pile of cash possible. To the extent money can fuel that fulfillment and joy, fantastic. But today we're gonna dig into the ways in which the best of intentions can take things a bridge too far; why it may be worth focusing on allowing yourself to use money to improve your life despite feeling a bit of guilt, if you've been a personal finance devotee for a while, or if you just weren't able to afford it in the past, and now you find yourself in a position where you can. 

So our fundamental truth today: Money is mostly meaningless without people. There are only a few things in life that are more consequential to your contentment in life satisfaction than money—chief among them, your relationships with other people. As humans, biologically social creatures, if our basic needs are met, we would probably be happier living on $20,000 per year of discretionary income in close proximity to everyone we love than living on $20 million per year isolated on an island, or maybe worse, with people that we don't like. Money is only valuable insofar as it can enable you to live the type of life you want. And cognitively, I think we know that. Where things become complicated is the intersection of these two topics. In the instances where we have to prioritize one, like saving money to have more money later, or the other: deploying money to enjoy life now. This is in some ways the fundamental question of personal finance, and we face these types of decisions almost every day. We'll be right back after a message from the sponsors of today's episode.

So for the sake of today's episode, pretend the personal finance worldview is epitomized in an imaginary place. We'll call it Ramseyville, for obvious reasons, though Dave is not the only elected official. You've also got Mayor Suze Orman, councilperson Jim Cramer, and a slew of HOA presidents, i.e., dozens and dozens of prominent personal finance writers who have strong points of view about money, like me. In Ramseyville, the culture is very different from what we are accustomed to elsewhere in the industrialized west. These seven baby steps are carved Mount Sinai-style into the town square, coffee shops are outlawed, and everyone has an 80% save rate. It is an entire town where everyone's trying to be a real estate mini-mogul, where restaurants can't survive because nobody eats in them, where meal prepping and free activities reign supreme. And for the sake of this hypothetical, we'll ignore the fact that no stock market based on the Ramseyville economy could ever support FI lifestyles, as there would be no corporate profits to generate returns. So just, you know, slide that little fact to the side. 

The scary thing about Ramseyville is that the roads around town are mostly paved with good intentions, but there are some sketchy back alleys full of ridiculous advice if you wander into the wrong algorithm.

Speaker 2: Poor people watch a lot of tv. Let me put it this way: If you have the time to watch reality TV, you're probably poor. 

Katie: Interesting. I would think having a lot of free time would indicate the exact opposite about your financial situation. But anyway, moving on. The cost/benefit analyses in Ramseyville are very simple, because we are optimizing for one thing, and one thing only: Money is the only thing that matters in every decision.
Now, well-meaning 20- and 30-somethings often choose to take up residence in Ramseyville in response to a desire to build wealth. 'Cause when you're young, in your twenties, likely your lowest-earning years, your access to money may be fairly limited. You're not able to participate in all the things you'd likely want to 'cause you literally can't afford to. Your twenties also happen to be the time in your life when we in Ramseyville often emphasize the importance of saving something, because it's when you have the most time ahead of you. The dollars that you invest in your twenties will grow more than the dollars you invest in, say, your forties. So what does a young citizen of Ramseyville do in response to this information? Well, if their income is relatively low, as it often is, they are probably making relatively extreme lifestyle choices in an effort to create some investable income. If something discretionary costs money that you could provide yourself for free, you don't spend the money. The more frivolous something appears to be, the harsher the treatment in Ramseyville. 

Speaker 3: Personally, I don't go out to eat, and even though I am a multimillionaire, I still don't go out to eat anyway, because it is such a waste of time and it is all set up incorrectly. And then I see all my other loser friends; they're always going out to eat, partying with their friends, and they're just wasting tons of time, wasting all their money on this stuff, and it's not even providing them actual value. 

Katie: Gosh, I would hate to have a bunch of loser friends who like having fun. I don't know about you. Sounds terrible. When we move to Ramseyville, we may only intend to stay there for a little while so we can get ahead. But thanks to the power of inertia, it is all too common to look up from the coupon pamphlet 20 years later and realize, oh my god, we have taken up permanent residence here. And throughout that time, we've been rejecting invitations for dinners out with friends who live outside the bounds of Ramseyville, spending our Saturday mornings DIYing our house hack because hiring a plumber costs money, all in the name of some glorious ill-defined future. 

Sure, we've probably made a lot of financial progress and if we've been at it for years, chances are we probably already amassed more than we needed, like, a long time ago. While we initially moved into this relatively extreme state, both literal and metaphoric in this case, in a desire to build wealth and optimize our lives for financial success, outstaying our welcome can inadvertently deprioritize and devalue the other areas of our life. Without noticing, we have permanently settled on optimizing our life for money, not joy or fulfillment. We have officially lost the plot. So how does this impact relationships and quality of life?

I've talked in the past about how sometimes when you get your shit together financially, your lifestyle and friendships change. They just do. Sometimes you realize that people are not in the same stage of life as you are, or they don't have the same values as you do, and that's okay. After all, I really sincerely hope that a sense of belonging in your friend group is not contingent upon dressing a certain way or driving a certain type of car or frequenting Nobu. And there are plenty of activities, like meeting for a potluck picnic in the park or going for a hike, that are fun and inexpensive, or totally free. But there are other activities, the likes of which are outlawed in Ramseyville, that require opening your wallet: group trips, music festivals, even simpler activities like restaurant meals. They require a financial commitment. Sometimes we are simply not in a financial position to participate, and there should be absolutely no shame in sharing openly with loved ones where financial limitations prevent us from booking the last-minute flight to Palm Springs for Coachella. But in the purely personal finance dogma worldview of Ramseyville, these things would be dubbed “wasteful” and a “distraction” from your eventual face-melting retirement, even if you can afford it, and even if you wanna participate. Sometimes we refer to this as not seeing the forest for the trees, or the juice not being worth the squeeze. Unintended rhyme.

The problem with most dogmatic personal finance black and whites is that they place all of the emphasis on the financial outcomes, and none of the emphasis on the social and quality of life outcomes, or at the very least, the latter is just an afterthought. In groups of people, whether they be friends, colleagues, romantic partners, you name it, it comes down to right-sizing your cost/benefit analysis. Back in the day when I was super, super, hyper frugal, I was penny-pinching everywhere possible. I would go to free exercise classes at the studio where I taught. So a couple days per week, my friends from class would walk over to a coffee shop afterwards to grab coffee or a muffin and sit around and talk for 30 minutes after class. But before the workday started, it was very early in the morning. So it was kind of a nice little activity. This was such low-effort, high-quality time together, where you're riding that endorphin wave, you're getting some caffeine, you're starting the day with friends bright and early, except I used to frequently skip this type of gathering—or attend, but then awkwardly sit and not drink or eat because I was trying to save money. And in my purely Ramseyville worldview, the $5 that I would've spent on cold brew on its face was a waste, 'cause I had cold brew at home. In Ramseyville, where we are only concerned with financial outcomes. I was making the quote unquote “right choice,” but I wasn't spending $5 for cold brew. I was spending $5 for 30 minutes of enjoyable quality time with friends, in a relatively cheap special group bonding experience. 

And sure, it's possible to create that type of community for free, too. We could have gathered somewhere else without food or drink. But the point stands, especially when the third spaces in Western society are typically coffee shops and restaurants, and in a cost/benefit analysis that considers both the life experience juice that one gets for the $5 squeeze, our outcome in this example has an incredibly high ROI. The chance to strengthen your bonds with friends and enjoy a sense of belonging? That is some of the best money you will ever spend. It's very cheap. I don't have to plug $5 into a compound interest calculator to know that I valued those experiences more than whatever three-digit number it's gonna spit out 20 years from now. 

“Coffee out” is something we point to as quintessentially frivolous. It's where we venture into the mix of aphorisms and mental models and life rules that apply a scarcity-fueled rigidity to what is valuable enough to spend money on, and what’s not. 

Speaker 4: It's part of your day. And you spend a dollar to $3 on a cup of coffee, which is approximately a hundred dollars a month. An example: A hundred dollars a month in a Roth IRA over 40 years is a million dollars. 

Katie: In that case, my choosing not to go 'cause I wanted to save $5 was ultimately meaningless compared to the time and community that I gave up to keep my $5. It's not that you have to say yes every single time, but if we're only ever concerned about the dollar value associated, we may be missing the forest for the trees, 

Speaker 4: You are just really wasting money. I wouldn't buy a cup of coffee anywhere, ever, and I can afford it, 'cause I would not insult myself by wasting money that way, and I can afford it. And chances are you can't. But you could. One day… 

Katie: You know what they say about the road to hell. We'll be right back after a message from the sponsors of today's episode. These types of trade-offs are challenging because there are no real means of testing what you should do ahead of time. There is no equation or section of the tax code that dictates when and how we should balance our money and our time with friends and family. But there are two tools that I want you to put in your toolbox when you're weighing your financial responsibility with your desire to, I don't know, participate in your life and activities with loved ones or colleagues.

Number one, set up a structural baseline. If you know that you need to save 20% of your income to hit your goals, you know the other 80% can be spent. Decide at the beginning of every month how much money you want to invest in relationships. Set it aside. Depending on your life stage and how much you've already saved and how much you're earning, this could be a relatively modest sum or a whole hell of a lot, but decide what percentage of your income that you are going to intentionally choose to devote to experiences with friends. Some months you may choose to devote more; other months, you may find you need to really rein it in. And if you find that things are tight, revisit any other discretionary areas of your life where you can make cuts, or determine instead an amount of time each month that you're going to devote to doing fun free things with your friends if the money isn't there: phone calls, long walks, inviting someone over for dinner to eat the food that you are already cooking should impact your budget minimally, if at all.

Number two, listen to your body. All right, I know that sounds really woo woo, but have you ever heard the phrase, “If it's not a hell yes, it's a no”? If you hang around a crowd that is frequently indulging in dinners, trips, activities, experiences, and you find that you need to be a little more selective with what you partake in to avoid going financially overboard, apply the “hell yes/no” framework. When you are invited, practice listening to your body's immediate response. Do you feel energized and excited by the prospect of joining? Or are you immediately full of dread and anxious about money? More often than not, your original gut reaction will be the right one about whether or not something is going to be worth it. And your conscious mind will either try to talk you into or out of it after the fact. There is a distinct difference between the genuine desire to do something with friends and then talking yourself out of it because of money, and FOMO. One is rooted in joy, while the other is rooted in fear. When I overdo it, it tends to be due to FOMO. And decisions made in FOMO often lead to financial regret later. 

So let's talk about my own experience putting down roots in Ramseyville that led to some regret. As you probably inferred from my earlier example, even just a few years ago, I routinely rejected invitations to go on trips, attend music festivals, go out to lunch. I basically didn't join any activity that wasn't free, because I was so narrowly focused on saving money. Now, at this phase in my life, currently living somewhere where I don't know many people and where I have ample opportunity to save money, but not a lot of opportunity to spend time with loved ones, I look back on my singular obsession with frugality and I feel a lot of regret. While I am obviously thrilled with the financial progress I made, it is obvious to me where my relationships and quality of life suffered because I put professional and financial growth first almost all of the time. Moving forward, my goal is to intentionally spend more money and time creating memories with friends and family, starting with bumping up our travel budget, as we need to travel to see most of our friends, and committing in the new year to actually taking more time off. I think I took eight or 10 days off in 2022, and I would really like to double that number. So I wanna end today's episode with some thoughts from my friend Jack Raines of Young Money. 

Jack Raines: The time value of money states that delaying your spending will increase the value of your portfolio over time. And if we had unlimited time here on this earth, then the story would stop there. Defer all spending as long as possible to have much money as possible at some indefinite time in the future. But we don't have unlimited time. To get the full picture of the relationship between money and time, you need to flip the equation around. The time value of money may show us how much the value of an investment will change between two points in time, given an expected annual return. But the money value of time shows us how much time we have left to exchange that money for an experience. While money tends to increase over time in the former, time tends to decrease over money in the latter. And that's why extreme frugality is so dangerous. It leads you to sacrifice countless experiences early in your life, just so you can try to cram them in your twilight years. 

Katie: For me, the life-changing moments did not have to be the expensive grand trips across the Atlantic Ocean or pricey dinners out. They were the sporadic mornings spent getting breakfast with a friend even though I had food at home; or the coffee dates spent commiserating over whatever adulting ailment we were both suffering from that week; or the team lunches with my favorite colleagues, with whom my time was cut unexpectedly short because of the pandemic, that FI dogma would've suggested I skip, because I packed a Lean Cuisine. Those were the little moments that forged my relationships, that offered a glimmer of hope during hard weeks, and ultimately had little to no bearing on my financial future. But had I only heeded the black and white language of Ramseyville civil code, they never would've happened. 

And you know what? To be honest, I probably missed out on a lot of potential moments by trying to heed that civil code. Sure, I would have incrementally more money today. But at what cost? It's important to remember what you are optimizing your life for, and the answer probably shouldn't be solely money, for any extended period of time. 

All right, y'all, that is all for this week. I will see you next week, same time, same place, on The Money with Katie Show. Our show is a production of Morning Brew and is produced by Henah Velez and me, Katie Gatti Tassin, with our audio engineering and sound design from the talented Nick Torres. Devin Emery is our chief content officer, and additional fact checking comes from the lovely Kate Brandt.