First World Problems and the Law of Diminishing Returns

First World Problems. It’s a new phrase being used around the country. It’s meant to be a gentle reminder that many problems (or inconveniences) in wealthy countries are very different than in poor countries. First World Problems typically arise from one’s privilege that people in third world countries would not have. The video below shows the ridiculousness of First World Problems when viewed from another angle.

Now your first world problem sounds crazy, right? It’s almost a privilege to have these problems which typically stem from expensive items or services.

What can we take from this video?

1) The main purpose of the video is to encourage people to donate to help provide a clean water source to those in need. This is a serious problem that we, in developed nations, do not need to worry about. Meanwhile, many families in rural Uganda are worrying about finding clean, disease-free water.

2) Many of our problems should not give us so much stress. I let this happen, too. It’s very easy to let these problems affect our mood. But what if, when a problem comes up, we take a step back and think, “Is this something I should really be worrying about?” If the answer is no, take a deep breath, be thankful you are in the position to have this inconvenience, and deal with it.

3) What if we remove all of our emotions and expectations from these expensive things and services?

Law of Diminishing Returns

In a 2011 study by Dr. Ronald Fischer and Dr. Diana Boer, they found the effect of increased wealth on happiness shows diminishing returns (forgive me for the economics jargon). As wealth increases from zero, each dollar earned provides a certain increase in happiness, until a certain point. After this point, each additional dollar earned increases happiness by a lower amount than before. This continues to occur until a plateau is hit, as Fischer and Boer describe, when each dollar increase does not increase happiness (and may even decrease happiness). This is called the Law of Diminishing Returns.

Law of Diminishing Returns

Law of Diminishing Returns (yes, I created this beautiful graph myself!)

Mo’ Money, Mo’ Problems

Fischer and Boer state:

“The effect of money on happiness has been shown to plateau – that is, once people reach the point of being able to meet their basic needs, more money leads to marginal gains at best or even less well-being as people worry about “keeping up with the Joneses.”

I love this statement! It’s so good that you should read it again. Now let’s break it down.

It consists of two parts:

1) Money earned to provide our own (INTERNAL) personal basic needs gives us high marginal returns (a lot of happiness per dollar).

2) Money earned to meet EXTERNAL expectations leads to smaller marginal gains.

Think about that. It makes so much sense! Money spent for internal purposes provides a much higher return on happiness than money spent for external expectations!!

People who hardly have enough to meet their own basic needs (housing, food, clothing, etc.) are happier with the money they have. They don’t care about not having that BMW or iPhone. They’re happy to have enough to survive at the moment. Their happiness per dollar is high.

Once having money above and beyond basic needs, life becomes more complicated. Rather than being happy to have the ability to buy just the cheapest beans, they may have trouble choosing which can of beans to buy since there are 5 types with very different labels. They will not buy the generic, cheap looking can of beans, because that would mean they’re poor (and they are above that, of course). Before they were happy having a $2,000 car that goes from point A to point B, but now will not accept a car without a sunroof and an iPod auxiliary input.

Shopping

How can we get to increasing returns?

This brings me back full circle to my point #3 from above: What if we remove all of our emotions and expectations from these expensive things and services?

What if we are to live simply and frugally and really focus our money on what we truly value without any external expectation? Is it possible to turn the diminishing returns into constant returns or, even better, increasing returns?

Law of Constant Returns

Law of Constant Returns

Law of Increasing Returns - How can we get here?

Law of Increasing Returns – How can we get here?

At my previous job, I could feel that each extra paycheck provided very little immediate increase in my happiness. I actually became less and less happy as the months went on and as I saved more. I decided to make a change, and those earnings have allowed me to leave the job, pursue new adventures, and travel. Society and social norms tell me that I’m wrong, that I should settle down, purchase a house, and continue to earn money to buy more. But to be honest, I don’t care what society tells me. None of us should. We only have a certain amount of time to live (and earn), so we need to be true to ourselves.

How can you better spend your money on what YOU want? Are expectations driving you to spend money on unimportant things? It is never too late to change.

Image courtesy of Ambro / FreeDigitalPhotos.net

About Trent

I started Frugal Purpose to share my love of personal finance to assist your pursuit of a more fulfilling life. I am a financial analyst by trade, traveler at heart, and want to share with you the beauty of this world.

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