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The Law of Diminishing Returns in Everyday Life

The Law of Diminishing Returns in Everyday Life

According to psychologists, our happiness peaks when we reach the magical salary of $75,000. Once we earn that much, our health and the quality of our relationships provide more joy than making more money ever could.

We need to feel safe, secure, and well fed, but once money pays for life’s necessities, we don’t need more to feel happy. 

Some people love their jobs, but I would wager most don’t. If money doesn’t make us happier, why do we strive for bigger paychecks? Why do we yearn to make more when each dollar provides less enjoyment?

Getting less value from our money is known as the law of diminishing returns. When it comes to money, it’s a rule most of us ignore.

The Law of Diminishing Returns in Everyday Life

To understand the law of diminishing returns, think about the last time you ate something tasty. For me, that would be a chocolate birthday cake.

When the waiter delivered that luscious slice to my table, I couldn’t wait to stab my fork into it. I took the first bite and let the sugary goodness settle on my tongue.

The cake was rich and decadent, and the anticipation of the first bite made it the most rewarding. I may have taken twenty forkfuls of dessert, but each subsequent bite provided less pleasure than the initial one. 

When we eat, the law of diminishing returns goes into effect. The more we eat, the less value we receive from eating. When we’re no longer hungry, our body feels less pleasure. Eventually, our body may even reject the extra bites of food we consume. 

There is a moment when we’ve had enough to eat. Sometimes we recognize this point, and sometimes we don’t. If you’ve ever found yourself rubbing your stomach after Thanksgiving, I’m sure you know what I mean.

If we’re not careful, we eat so much that we begin to feel sick. Sure it tastes good when that food hits our tongue, but it’s easy to see how consuming too much of a good thing can quickly lead to stomachaches and bloating. 

Diminishing Returns & Our Desire to Earn More Money

We experience diminishing returns in most aspects of life, including the amount of money we earn. 

Unfortunately, most of us never recognize this fact. We see more dollar signs, commas, and digits and assume more happiness will follow. But it’s not true. At some point, each dollar provides us with less pleasure than the one that came before it.

When we eat, the law of diminishing returns is capped by the size of our stomachs, but when it comes to money, our desire for more has no limits.

Limits & Boundaries

Have you ever noticed how you can’t think about food right after you’ve eaten a large meal?

When I was a kid, my dad would serve up a massive stack of french toast and bacon on Saturday mornings. My brother and I would rush to the table, scarf down our breakfast, and return to the couch to watch Saturday morning cartoons.

After my dad cleaned the dishes, he would step into the living room and ask, “What do you want to eat for dinner?”

The question always felt impossible to answer. The size of our stomachs limited our appetites, and we were so full of food we couldn’t contemplate eating again. 

Sure we knew lunch and dinner were on the horizon, but as we sat on the couch digesting breakfast, our brains rejected the idea. No matter how hard we tried, we could never give my dad an answer.

The Desire for More Money

While we can only eat so much food before feeling sick or drink so much alcohol before passing out, our desire for money can feel insatiable.

No matter how much we earn and save, we dream of more. When I was working, I spent countless hours hovering over my desk, searching for bigger paychecks and promotions. When I was promoted, I researched pay scales and immediately wondered how long it would take to reach the next level.

I cried when I walked away from my high-paying career to become a stay-at-home mom. I was sad about losing my identity but utterly distraught over losing my paycheck.

FIRE, Financial Independence and A Narrow Focus on Money

After tracking every dollar, cutting expenses, and setting big goals, earning more became an ingrained part of my personality. Focusing on FIRE and financial independence made it even more difficult to stop thinking about money.

I know I’m not alone. I see people reach their magic number and immediately monetize their hobbies or create new side hustles.

I’m not immune to the drive to earn more. My husband wants to fulfill his lifelong dream of owning a house on the water. I’m aware of the pull to bring in a paycheck, even though I don’t want a career anymore.

The Law of Diminishing Returns and Money

If you are building your wealth, reaching for FIRE, or struggling to make ends meet, you might not believe me. The idea that you can have enough may feel far-fetched. But, believe me, eventually, you will get to a point where having more money doesn’t provide more happiness.

The benefit of earning more diminishes, but most of us fail to see the tipping point. We work another year and put in more hours to make our giant pile of money grow even bigger.

We feel the endorphins associated with gaining more money and continue to seek the reward of earning and saving. But, we don’t feel happier after getting promoted or receiving a bonus. Weeks or months later, the excitement wears off, and we start pushing harder.

For some reason, our brains seem to block out the time, energy, and effort associated with growing our nest egg. We go to work and smile as we add more commas to our string of numbers but fail to realize that we are trading our valuable time for money.

If those dollars don’t provide extra value to our lives, why are we so driven to accumulate more of them? Of course, money can buy things we need and want, but at some point, we have more than we need.

Yet our brains still struggle with the notion of turning off the tap and stopping the steady stream of income that hits our bank accounts. We continue to strive for more when the truth is we already have more than enough.

If we stop, press the pause button, and listen long enough, we may find ourselves perfectly content with all that we’ve already accumulated. We may recognize that adding more won’t make us any happier.

I wrote about this recently in a post about choosing quality over quantity. At some point, adding more doesn’t make us any happier. We can own a closet full of clothes and still fail to find anything to wear. 

Finding Happiness

How do we know when we have enough?

Have you ever gone to the grocery store when you are hungry? Have you noticed how you can fill your cart with so much food that you can’t possibly consume it all?

You drag bags from the car and unpack the groceries but can’t find space on the shelves for everything you purchased. At the end of the week, you find yourself throwing out spoiled fruit and shaking your head. As you look at the pile in the trash, you wonder how you allowed yourself to purchase so much in the first place.

The same thing can happen with money. You can spend your days working in a job, striving to climb the corporate ladder, only to look back and see a pile of money you’ll never have the time or desire to spend.

Each of us has experienced a moment where we overate or drank too much alcohol. Why didn’t we stop ourselves? Because we thought one more sip or one more bite would provide us with one more moment of joy. Yet, with that extra glass or forkful of food, we are less happy than we were moments before.

The rule of addition by subtraction teaches us that more doesn’t always lead to a better outcome. We can gain more time freedom, and deeper relationships when we stop chasing dollars that won’t increase our happiness. We can find more joy when we step out of the rat race, stop scanning spreadsheets, and keep our hobby instead of turning it into a side hustle.

It’s hard to recognize the law of diminishing returns and even more difficult to stop building our nest eggs. It’s tough to stop padding our wallets even though more money won’t provide more happiness.

Believe me. I know. I wrote this post, understand the rules, and still find it difficult to turn off the desire.

David F.

Monday 19th of September 2022

Definitely good reminders. Thank you for continuing to write thoughtful content.

One Frugal Girl

Monday 19th of September 2022

@David F., Thank you.