One of the most striking problems around the world today is the vast income inequality. The rich get richer and the poor become increasingly desperate. Of course this is not an accident. A level playing field would be quite simple to create, technically speaking. Income caps could be imposed on top earners so that nobody could make more than a certain amount per year. Profit sharing in companies could be required, or universal basic income could be established. The list goes on. But humans have a problem with greed, we really like having more than we need. I think at an evolutionary level it makes us feel secure, if we have more than enough money we’ll have an endless supply of food, shelter, or whatever else we may need. But like I’ve said before, we’re terrible judges at determining what we actually need and this in turn screws over other people. Just the other week a report came out in the news which determined that the 8 richest people in the world have as much wealth as the bottom 50% of the world’s population. Think about that for a second, 8 people with as much money as 3.5 billion others, combined. If Bill Gates gave away all of his money he could make 85,000 people millionaires.
Why do I bring all this up? Because part of the struggle of reaching financial independence or early retirement is being secure in knowing that you have enough. If you don’t cut yourself off from work once you get there you could keep working as long as everyone else does for more and more money that will do absolutely nothing for you. Once you have enough, you are wasting your life away if you’re doing something you don’t enjoy. You’re also occupying a job that someone else may need more than you. And you’re increasingly likely to consume more natural resources if you have an excessive amount of money lying around.
The law of diminishing returns is especially true for money. When applied to income, it states that we rapidly increase our levels of happiness/satisfaction up to a certain point. Once we hit that point and continue moving above it, our increased levels of satisfaction drop off significantly, essentially plateauing after hitting the mark. Studies have been completed to determine that the level of income at which diminishing returns begin is at $70,0000. Therefore, any increase in salary past this mark will have much lower effects on a person’s well-being than an increase below this level (think 20,0000 to 35,0000 vs. 70,0000 to 85,0000). Why might this be? Because once at $70,000 all our needs are covered comfortably. We can afford a place to live, put food on the table, and have cash left over for ourselves. But if you throw $250,000 per year at someone they’ll have so much left over that they’ll either have no use for it all or will buy pointless items that don’t fundamentally increase their happiness.
So how do we figure out what is actually enough for ourselves? Look at a typical year of spending. Buy what you typically would and even splurge occasionally but avoid being excessively greedy. Track what you purchase throughout the year and that total will tell you everything you need to know. As I’ve mentioned before, you’ll want to have a stash of about 25 times your typical annual spending level. If you want a reasonable level to shoot for think along these lines; single person $15,000 to $20,000, small family $20,000 to $30,0000, large family $30,000 to $40,000 per year. There is no point in working for the rest of your life just to call yourself a millionaire or to be able to buy more cars than you know what to do with. By only taking what you need, you open the door for others who may be struggling. You’ll have the time to do what you love and be around who you love more often. You will have more time on your hands for rewarding opportunities and situations may present themselves to you that would not have otherwise if you were still working. You can go volunteer and help others. If something interests you and ends up bringing in more cash so be it. The point is to be self-aware of your situation and of others around you. The sooner we become generous and compassionate towards one another and learn to share, the sooner we can create a peaceful world.