How Spending Money Affects Happiness

“The business of life is the acquisition of memories. In the end, that’s all there is.” – Mr. Carson, Downton Abbey

Money can’t buy happiness, but it can make you happier up to a certain point.

By now most people have seen the studies that suggest $75,000 a year is the income threshold for happiness. Anything more than that doesn’t necessarily make people much happier.

So how can you use money to make decisions that can increase your overall level of happiness that have nothing to do with how much money you make?

Authors Elizabeth Dunn & Michael Norton tried to answer this question in their book, Happy Money: The Science of Smarter Spending.

They laid out five suggestions, all backed by tons of research, to help people use money decisions to increase happiness. They came to some interesting conclusions.

1. Buy Experiences
Spending your money on material items won’t make you any happier. But buying experiences will. Things like trips, movies, sporting events or even gym memberships rank much higher on the happiness scale than material possessions.

We tend to adapt to the new things we buy and the satisfaction wears off. The same region of the brain that responds when we anticipate something good loses interest once we’ve gotten it.

Most material purchases end up being regrettable in hindsight. Over 80% of people state that their biggest regret is something they didn’t do (experiences) while the opposite was true of material purchases (wished they hadn’t bought something).

The research shows that satisfaction with experiential purchases increase over time while material purchases show a decrease in happiness as time passes.

The biggest bang for your buck comes from unique opportunities or social connections with other people.

Many people agree that your college years will be some of the best in your life. The majority of college students are basically broke.  Do you think money factors into their overall happiness or makes that experience worse?

Lesson:Social connections and experiences with friends and family will make you much happier than spending money at the mall on yourself.

2. Make it a Treat
In the book the authors share that comedian Sarah Silverman’s favorite thing in the entire universe is fart jokes. But she learned early on in her career that too many at one time caused the novelty to wear off.

Now she only uses them in moderation which allows her to enjoy the periodic well-placed flatulence-laced joke even more.

An abundance of something may actually decrease your enjoyment of it over time. To have the desired effect of increased happiness you need to make certain aspects of your life a treat to enjoy them more.

This is the case with chocolate, alcohol, Starbucks or basically anything that we can take to the extreme.

Research shows that most wealthy people don’t stop to admire life’s little pleasures nearly as much as others.

It’s counterintuitive, but knowing that you have access to all of the things that money can buy actually reduces your appreciation of the little things.

As great as money can be, it can lead to more stress, more work and more financial envy.

Lesson: Most things go better in moderation and infrequently spending on those treats can increase your happiness.  Also, enjoy life’s small pleasures and appreciate what you have.

3. Buy Time
Thinking in terms of how valuable time can be is the next route to increasing your happiness.

You’d think that major life events would heavily impact our stress levels, but it’s really the day-to-day hassles that cause the most problems.

People who are strained for time find it difficult to enjoy their money because they always feel rushed and spend most of their time on activities associated with high levels of stress (many of which are career-related).

Yet based on the diaries of workers in both eras we spend an average of 4 more hours per week engaging in leisure activities than those in the 1960s while work hours have remained relatively constant.

We constantly stress about work but it’s basically an illusion that we work more today than people did in the past (smart phones don’t help with this illusion).

Those that have better time management skills feel like they have more free time which can lead to more exercise, volunteer work and other activities that are linked to increased happiness.

Lesson:Think about how a purchase will affect the way you use your time before buying it (this works for compounding and retirement savings as well — save more now, have more wealth & free time in the future).

4. Pay now, Consume Later
This is the golden rule of personal finance yet probably the hardest one for people to follow.

The authors discussed how the anticipation of a vacation leads to a bigger boost in happiness in the weeks leading up to your trip than the feeling you have in the weeks immediately following it. The same is true of Christmas and New Year’s Eve.

Think of delayed consumption in the same way. By saving for big ticket items in advance, you get that feeling of anticipation for your purchase without the debt hangover in the aftermath.

The problem is that credit cards make it extremely difficult to have this mindset because they’re so easy to use without thinking of the nasty consequences of debt.

In one study, people were willing to pay double the price for a sold out ticket to a sporting event with a credit card than they were using cash.

Plus, people aren’t very good at tracking their spending habits. In another study, researchers asked people to estimate their expenses before opening their monthly credit card bill. Every single person (out of 30) underestimated their bill by an average of 30%.

Lesson:Save first, spend later, and track your expenses to increase wealth and happiness.

5. Invest in Others
Interestingly enough, the spending choice that has the biggest effect on a person’s happiness is how much money they spend on others.

Study after study shows that the more people invest in others, the happier they are. It’s not necessarily huge amounts of cash either. Even donating small amounts puts people in a better mood.

Dunn and Norton found that donating money to charity had a comparable effect to doubling household income on levels of happiness.

And people who donate to charity feel wealthier even if they aren’t from an income point of view.

Lesson: Give to others to to help those in need and boost your own happiness.

Book Review: This was a great book and also a quick read. It contained tons of good insights, many of which are counterintuitive with the approach most people take with their spending habits.  Some really good perspective on what truly matters in life.

Source:
Happy Money: The Science of Smarter Spending

Further Reading:
Financial Envy