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Abu Dhabi, UAEFriday 14 December 2018

Saving money does make you happier and here's the proof 

According to a study at Texas Tech University in the US, those who focused on increasing assets were happier than those paying down their debt loads

Illustration by National Staff
Illustration by National Staff

The argument over whether you should invest or pay off debt usually focuses on financial numbers, such as rates of return and interest charges. Maybe happiness should be part of the equation as well.

Studies in several countries, including the United States, Norway, Ireland and Spain, have found high levels of financial satisfaction among elderly people. Happiness with our money situation tends to rise with age, even though our income peaks in midlife and then generally declines. Why is that?

Further studies show that what we own and what we owe make a difference. One study of 3,751 US adults ages 30 to 80 found that increases in assets and decreases in debt over time "contribute substantially to the life course pattern of financial satisfaction".

Fair enough. But then two Texas researchers looked into which of those two actions - paying down debt or building up investments - was the bigger contributor. Increasing assets was the hands-down winner.

What came first - debt or unhappiness?

People with more debt were less satisfied, but lowering their debt loads didn't seem to make them much happier, says Russell James, a certified financial planner and director of graduate studies in charitable planning at Texas Tech University in Lubbock, Texas.

Mr James conducted the study with Scott Garrett, then a doctoral candidate and now a certified financial planner at Ronald Blue Trust in Houston. The pair tracked 839 adults age 50 and older for four years to measure the changes. The researchers don't know why the investment effect was bigger but say personality may play a role. In other words, unhappy people may be more likely to get into debt.

"If a person is dissatisfied with where they are in life, maybe that makes them spend more on credit cards," Mr James says. "We don't know if the same patterns would be true for younger people, but the researchers were confident enough in their results to advise financial planners to focus on building assets as "the best way to improve client financial satisfaction".

"The thing is, financial planners already take a pretty balanced approach to the "invest or pay off debt" question. They encourage both. They want people to save for retirement and emergencies while educating them about the difference between "good" debt, which helps people get ahead financially, and "bad" debt, which doesn't."

Financial experts typically prioritise paying off high interest rate debt such as credit cards while taking a slower approach to mortgages and student loans, which tend to have lower, tax-deductible rates.

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Read more:

'We live on a shoestring in the UAE': Spendthrift expats reveal budget secrets

Broke after the holidays? Here are 20 tips to get your finances back on track in the UAE

Dubai resident: 'I retired at 37 after achieving financial independence in two years'

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You are chasing the wrong goals if ...

The people who really need to hear this message are the do-it-yourselfers going all-in on debt repayment, not realising what they may be costing themselves in the long run. These include those that are:

• Struggling with far more debt than they can realistically hope to repay.

• Overpaying a mortgage, which is some of the cheapest money available, rather than saving for retirement or paying down more expensive debt.

• Killing themselves trying to pay off student loan debt early, especially when those loans have low, fixed rates.

How much debt is too much depends on an individual's situation, but if you're struggling to make minimum payments or your credit cards, medical bills and personal loans exceed half of your income, you're probably already there.

Here in the UAE, saving and debt management are big discussion points. Earlier this week The National spoke to several expats, who revealed how "living on a shoestring" was making life in the UAE more affordable and helping them to save.

This was positive news following the release of a survey by the payment solutions company, Payfort, earlier this month that revealed that nearly half of UAE residents are still in debt and 12 per cent are actively seeking a loan.

According to the latest data from the Central Bank of the UAE, total individual borrowing in August in the UAE totalled Dh332.8 million, down by 5.8 per cent from July and 3.5 per cent from last year.

Furthermore, almost three in 10 (27.8 per cent) UAE residents say they are unable to save any money. And while 38 per cent set aside some funds, they can only save 10 per cent of their income a month.

The debt situation in the US is a little more positive where most families have manageable debt loads, according to the Federal Reserve's latest Survey of Consumer Finances. Only 7 per cent spend more than 40 per cent of their income on debt payments, the lowest level since 2001.

Where many fall short is with emergency and long-term savings. The Federal Reserve says 44 per cent of adults cannot come up with $400 for an unexpected expense, while more than half of working-age adults risk not being able to sustain their standard of living in retirement, according to the Center for Retirement Research at Boston College.

It is particularly important not to stifle retirement savings, since the longer you wait to get started, the harder it is to catch up. You also can't get back the company matches, tax breaks and compounded returns you pass up.

Being debt-free is a great goal to achieve — eventually. But your haste to get there shouldn't leave you poorer, and less happy, in the long run.