I recently overheard a woman complaining about how much she was spending on her vacations. This individual was at the stage of life where she could travel extensively. After taking many exotic vacations, usually with a peer group of friends with first class accommodations, she still felt unfulfilled. While she felt very fortunate to experience so much, she confessed something interesting. She said, “You know, the first trip I took 10 years ago after I retired was amazing. Since then, I’ve noticed that no matter how much I spend, each one has become a little less thrilling.”

Without realizing it, she was experiencing something called the Law of Diminishing Returns. You may have experienced this yourself in one form or another, especially in your financial life. This is an important economic concept, because understanding it will help you grow and preserve your financial resources, as well achieve the highest possible value for the money you do spend. Within the Law of Diminishing Returns, this is known as the optimal point of usefulness.

If you aren’t clear how the Law of Diminishing Returns works, here is a simple analogy with food:

Imagine making a pot of soup. At first, adding salt, herbs, and spices makes a huge difference—the flavors come alive, and the soup tastes much better. Add a bit more seasoning, and it still improves, but not as dramatically. Eventually, you reach the optimal point, sometimes called the point of diminishing returns or optimal input level. This is where each extra pinch of seasoning gives you the biggest possible boost in flavor for the effort and cost.

After that point, extra seasoning still changes the taste, but the improvement is smaller. Keep adding, and eventually, the extra effort or cost can even hurt the result.

The mistake the woman retiree made was assuming that she needed to spend more money to make her trips more thrilling. She likely could have just mixed things up a bit and achieved a higher level of happiness, and possibly even spent less, and experienced more.

If you are a royal watcher, you may be a fan of Catherine, Princess of Wales (the former Kate Middleton, also known as Princess Kate). She has an interesting habit: She will often mix modestly priced clothing pieces with high end designer brands. It has been called the “high-low” style approach, and it is fascinating as she has obviously figured out that at some point, you do not get intrinsic value (or happiness) from spending more. In fact, she often wears the same pieces multiple times in different combinations to get the highest value for wardrobe investment. Some of her items cost thousands of dollars (such as a designer jacket) which she will then pair with a blouse that can be purchased for less than $50. She does not feel the need to have a high-end designer label on every article of clothing.

She has figured out the optimal point, where each dollar spent gives her the most style and usefulness for the money spent. That’s the Law of Diminishing Returns: the more you add beyond that sweet spot, the smaller the benefit you get from each new addition.

When it comes to spending money on things such as home renovations, learning a new skill, travel, and hobbies, the same principle applies: the optimal point is where each extra dollar spent has still created a bit more happiness for you. Beyond this optimal point, the marginal return—the extra gain from the next dollar spent—starts to shrink.

For young adults, accumulators, and retirees, being savvy and understanding the Law of Diminishing Returns is key to making smart financial decisions and preserving wealth. It is the point you know that you will not be happier. It means not overspending on one more “next thing” but instead directing resources toward other opportunities with more potential—and then your happiness has a chance to get a boost in other ways.

Kristina Bolhouse, CPA/PFS, CFP®

President/Shareholder

© 2025 Kristina Bolhouse and The Arkansas Financial Group, Inc., All rights reserved.

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