Sometimes, we spend money without even thinking about the consequences. Photo: emdot via Flickr.
On the whole, we have it good in America.
In 2012, Gallup published figures for the median household income in different countries around the world. While Gallup's findings don't jive perfectly with the Census Bureau's reports, the takeaway is the same: Individually, we have far more money than most people around the world.
According to Gallup, the median household income in America sat at $43,585 by 2012 -- the sixth-highest in the world. Taking the whole global population into consideration, median household income sat at $9,733. In other words, we in America earn more than four times as much as the average human being.
So how much of that money are we spending?
I've taken statistics recently released by the Bureau of Labor Statistics to show how much people spend based on their yearly salary.
Technically, BLS used the word "Consumer Units" for what I refer to as "households." If the difference is important to you, you can read about it here.
How Much Does the Average American Household Spend? | Create infographics
This doesn't tell the whole story
It's important to remember that the chart above is only one way to look at our spending behaviors. This is the first layer of the onion that is our financial habits, and we cannot stop there.
It's possible that earning more doesn't always mean willingly spending more. For example, these spending figures could be partly a function of where one lives. An engineer in New York City will likely get paid more -- and have to pay more for the necessities -- than someone with the same job living in rural Iowa.
This could also owe partly to the fact that as people age, they tend to earn more and also start families, which require higher levels of spending. In fact, those in the upper quartile of earnings had nearly twice as many people in their households as those in the lowest quartile.
There's more at play: hedonic adaptation
Having said that, I don't think these different life circumstances entirely explain the difference in spending habits. For instance, those earning over $150,000 spend almost three times as much money on alcohol, vehicle purchases, and entertainment than a household bringing in less than $70,000 per year.
To me, this is a sign that as some of us get wealthier, we fall prey to one of the most insidious psychological traps: hedonic adaption. In its simplest sense, this means that we tend to adapt to new levels of wealth quickly, buying increasingly expensive stuff. But purchases of bigger and better things only give us a short-term bump in happiness, while our long-term contentment remains unchanged.
How to overcome hedonic adaptation
In 2010, researchers from three universities attempted to tackle the question of hedonic adaptation and overall life happiness. They posited that there were three main components to happiness: genetic predisposition, life circumstances, and intentional behavior. Here's how powerful each is hypothesized to be:
How Is Our Happiness Determined? | Create infographics
The huge takeaway here is that "Life Circumstances" includes things like making more money or spending more on entertainment, cars, or alcohol. The effect on happiness of such pursuits is muted at best.
The area where everyone -- high and low earners alike -- should really be focusing their time, according to the researchers, is on "Intentional Activities." This can be broken into two parts: the activity itself and how we think about it.
Regarding the activity, people should intentionally introduce activities (not things) into their lives that are both variable (not always present) and dynamic (not always the same) -- for example, having a close group of friends to share your life with or traveling to new places. Unlike the new car, these things are not always accessible, and they will always be changing.
And for the positive benefits of these activities to last, we need to pay careful attention to them. Specifically, practicing gratitude and mindfulness goes a long way in keeping you happy. It also helps you make the most of what you earn: If you focus your time on the 40% box of "Intentional Activities," rather than the 10% box of "Life Circumstances," you'll keep your spending much lower.
That means more money to invest and thereby achieve financial independence earlier. If you want the time to travel, be with your family and friends, or pursue your passion (unless you're lucky enough to be doing that in your day job), you need some level of control over your time. That control comes from financial independence, and at the end of the day -- as fellow Fool Morgan Housel once put it -- "having control over your time is the only sensible financial goal."
