MONEY THOUGHTS: Jump off the hedonic treadmill

CHARLES Dickens’ novel David Copperfield was initially serialised from 1849 to 1850, and then published as a complete novel in 1850. It is one of his best-loved books, and is deemed his most autobiographical.

Charles was born in 1812, and when he was only 12 years old in 1824, his father John was sent to a grim debtor’s prison south of the Thames in Southwark (pronounced “suh-thuk”), London, called Marshalsea because of a £40 unpaid debt to a baker.

Young Charles was forced to work in a shoe polish factory during this traumatic period of rampant child labour.

John was able to leave the notorious Marshalsea prison after three months only because his mother, or Charles’s grandmother, died leaving him an inheritance, which John used in part of to repay the baker’s stubborn debt.

In David Copperfield, Charles created his colourful character Wilkins Micawber — who finally made it big as a magistrate and sheep farmer in Australia after escaping England.

But for a long time before that, Micawber was a well-spoken eternal optimist in protracted and persistent financial trouble.

Scholars maintain that Charles based the broke but kind and moral Micawber on his father.

The most famous Micawber quotation from that novel hinges on the core principle of cash flow management: “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness. Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

MICAWBER PRINCIPLE

Those two now-famous Dickensian lines are called the Micawber Principle.

Unlike the current 100 pence to one British pound system put in place on the United Kingdom’s Decimal Day on Feb 15, 1971, before that — for about 1,200 years from about 775 AD — its currency system was based on 240 pence to a pound, comprising 12 pennies to one shilling, and 20 shillings to a pound.

Once we understand this British currency system of Charles’ time, Mr Micawber’s advice to David Copperfield makes better sense within our context of responsible personal cash flow management. We will now break down Micawber’s advice.

First; “Annual income twenty pounds, annual expenditure nineteen pounds nineteen and six, result happiness.”

Back in the 1840s and 1850s, working labourers earned between 10 and 30 pounds A YEAR (Today, the UK’s minimum HOURLY wage is more than £12, which highlights the devastating effects of inflation over the past 180 years).

So, Micawber was probably referring to a poor labourer earning 20 pounds a year, but spending 19 pounds, 19 shillings and 6 pence as being able to generate an annual cash flow surplus of 6 pence a year, which is a healthy financial state.

Contrast that with Micawber’s second sentence: “Annual income twenty pounds, annual expenditure twenty pounds ought and six, result misery.”

Here, someone earning 20 pounds yet spending 20 pounds, 0 (or ought, instead of the more correct use of nought for zero) shillings, and six pence, would have an annual cash flow deficit of 6 pence a year, which is an unhealthy financial state to be in.

In John Coleman’s book Good Money — Six Steps to Building a Financial Life with Purpose, his third step is “Consume Wisely” (For my takes on Coleman’s first two steps, do read my previous two Money Thoughts columns here: www.nst.com.my/authors/rajen-devadason).

Bottomline: To live our financial lives wisely, we should aim to earn more than we spend. While that advice is simple and basic, far too many of us live our lives with persistent cash flow deficits because we spend more than we earn, facilitated by consumer credit.

Coleman provides us with a way off that sad, fiscally unsustainable treadmill. He explains:

“Spending is a huge component of our relationship with money. We work to gain the financial resources to purchase food, a place to live, transportation and medical care.”

All those are essentials.

But we never stop there.

HEDONIC ADAPTATION

As Coleman observes: “Then on top of these necessities — the essentials of life — we layer our discretionary purchases.”

We all want to elevate our lifestyle. It is perhaps the most natural human economic trait.

Coleman writes: “At the heart of what drives such escalations in lifestyle is a principle called hedonic adaptation — sometimes termed the hedonic treadmill. Hedonic adaptation describes the way we quickly reset our lives and expectations when we experience an inflow of money.”

So, if we want to experience no (or low levels of) financial stress, we should do all we can to live financial lives marked by consistent cash flow surpluses.

To do so, we should either earn more and spend less, preferably both. Here are three pieces of advice I often give my clients:

1. Work harder, longer and smarter;

2. Exercise delayed gratification; and

3. When spending money, focus more on experiences than stuff.

To spend less, we must proactively choose to hop off our personal hedonic treadmill and thus spend less, generate consistent cash flow surpluses, save and invest that difference, and do so for a long time with two different investment goals in mind: capital gains and passive income generation.

Easier said than done? Definitely.

Utterly necessary? Absolutely.

Rajen Devadason, CFP, is a Securities Commission-licensed Financial Planner, professional speaker and author. Read his free articles at www.FreeCoolArticles.com; connect with him on LinkedIn at www.linkedin.com/in/rajendevadason, or via rajen@RajenDevadason.com. You can also follow him on X @Rajen Devadason and on YouTube (Rajen Devadason).

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المصدر: New Straits Times