The key to a high savings rate is understanding happiness

Once you’ve reached at least a middle-class income, the fastest way to reach financial independence is, counterintuitively, to increase your savings rate, rather than your income. Play around with this and you’ll quickly see that the key to early retirement, regardless of income, is a high savings rate. But how does one actually achieve that? It’s not about slashing every luxury and living a Spartan lifestyle. The real secret sauce lies in understanding what truly makes us happy.

There is a pervasive, underlying myth in our society that buying things will make us happy. And this is true to a point. However, once we’ve reached a certain level of safety and well-being, that new car or the latest smartphone might give us a momentary thrill, but it’s fleeting. This phenomenon is known as hedonic adaptation.

Hedonic Adaptation is a psychological term that explains how humans quickly return to a stable level of happiness despite major positive or negative life changes. Bought a new mansion? Thrilled for a week, and then it’s just home. Got a new shiny gadget? Fun for a few days, and then it’s just another thing to charge. We quickly become accustomed to new pleasures, and they lose their appeal.

Our desire to be happy is rooted in our biological makeup. Dopamine, Oxytocin, Seratonin, and Endorphins are chemicals that create sensations we associate with joy, contentment, and satisfaction. Recognizing that these feelings are biochemical reactions doesn’t diminish their importance; recognizing how and why we evolved to seek them is a crucial roadmap for understanding happiness.

Maslow’s Hierarchy of Needs highlights the progression of human needs from the physiological all the way up to self-actualization. Financial security is a cornerstone in this hierarchy. By achieving a high savings rate and becoming financially secure, you create a stable foundation upon which the higher levels of happiness and fulfillment can be built.

By contrast, consumerism leads us to seek happiness in material possessions, draining our resources, and thus our security. Any purchase that is not solving one of the basic foundations for human contentment is bound to lose its luster and ultimately only serve to delay our path to financial independence. A basic rule to live by when deciding whether to buy something: will buying this remove a problem that currently exists in my life?

For example, if you already have a functioning vehicle, purchasing a new sports car on credit will not lead to increased happiness because you already had your transportation sorted. By contrast, if you have a dishwasher that keeps falling open causing you to repeatedly trip over it, fixing or replacing that dishwasher will remove a negative in your life, thereby increasing your happiness.

Reaching financial independence means we have almost certainly achieved the bottom rungs of Maslow’s hierarchy, and the freedom and time it provides us to pursue our true purpose make it a heck of a lot easier to reach the lofty heights of self-actualization. Recognizing that material purchases do not bring us lasting joy unless they directly contribute to our hierarchy of needs naturally leads to a more frugal lifestyle. Thereby increasing our savings rate without feeling deprived.

For an excellent deep dive on the topic, I highly recommend you check out “The Art of Happiness” from your local library. Co-authored by the Dalai Lama and psychiatrist Howard Cutler, it blends Eastern spiritual wisdom with Western scientific analysis to understand what actually makes people happy: building relationships, meaningful work, community engagement, and personal growth.