Last Updated Jul 23, 2010 9:51 AM EDT
Economists offer interesting insights into spending with something they call "utility theory." It goes something like this: Spend more than necessary on anything -- your car, home, clothes, and so on -- and you won't increase your happiness. You'll simply spend more money.
But that's not what marketers want you to believe. We're constantly bombarded with very persuasive advertisements telling us we'll be happier, sexier, healthier, or smarter if we just buy their stuff. Really? I arrange my life to avoid and ignore advertising messages as much as possible. When I do encounter it, I just tune it out as background noise.
Want enough for retirement and enough for now? I advocate that you apply a smart spending strategy to all your purchases. Spend "just enough" to meet your needs and be happy. Just enough is different for everybody, of course, so you'll need to really understand yourself and your needs to make the right choices for you. Don't let anybody else, particularly advertisers, tell you how much is "just enough" for you.
So how much income do you need to be happy? One study put the break point at somewhere between $50,000 and $90,000 per year. According to this study, people making more than $90,000 per year weren't significantly happier than people making from $50,000 to $90,000 per year. Here's a video clip explaining this result and its implications from Dr. Somnath Basu, Director of the California Institute for Finance at California Lutheran University.
These insights can help you determine how much total income you'll need for retirement. Then, you can estimate how much retirement savings you'll need to generate this income, together with other income such as part-time work and Social Security benefits.
So spend just enough, and save just enough, and you're on a good path to happiness before and during your retirement. It may take some discipline and effort, but I can tell you, it's well worth it.