How Your Money Can Buy You Happiness

in Financial Planning by

Conventional wisdom says that money can’t buy you wisdom. What it fails to consider, however, is that we often don’t spend our money in a happiness-maximizing way.

In 2010, Professors Elizabeth Dunn, Daniel Gilbert, and Timothy Wilson collaborated on a research dialogue titled “If Money Doesn’t Make You Happy, Then You Probably Aren’t Spending it Right.” The purpose of the study was to examine whether the relationship between money and happiness was weakly correlated due to the way that people spent their money. Based on their findings, they put together eight recommendations for how people could better spend their money to maximize their happiness:

  1.      Buy more experiences and fewer material goods
  2.      Use money to benefit others
  3.      Buy more small pleasures and fewer large ones
  4.      Forego extended warranties and other high priced insurance
  5.      Pay now, consume later
  6.      Consider peripheral features of purchases
  7.      Beware of comparison shopping
  8.      Pay close attention to the happiness of others

Experiences: An Unparalleled Return on Investment

A research study conducted by Nobel Prize Winner Daniel Kahneman has shown that money only contributes to happiness up to an income level of $75,000. They found this number to hold true in cities with high costs of living as well, such as New York and London. For those with discretionary income, how do you maximize your happiness?

Van Boven and Gilovich (2003) studied the effect that experiential and material purchases had on consumers.  What they found was that people found their experiential purchases to be better financial investments than their material purchases. This seems backwards – could a family safari trip to Africa really provide a better return-on-investment than investing in Google? The reason this is the case is that experiential purchases often made consumers happier, contributed more to their overall happiness in life, and represented money better spent. In other words, experiential purchases are viewed as better financial investments because they represent money better spent.

The reason that experiential purchases are often viewed as money well spent? They are more open to positive reinterpretation, are more central to one’s identity, and generate social capital. Though every family trip is almost guaranteed to have some major argument or some discontent, there’s almost always a funny story or memorable experience that leads us to have positive views of our trips.

Experiences also help define us. What we choose to do is often a reflection of our interests and curiosity, and show others who we are as individuals. Experiences also carry more social value because they are often shared with others. You’re more likely to cherish an experience shared with people you are close with, such as the family safari tip.

Similarly, going to a baseball game with your buddies or going to happy hour with your co-workers allows you to establish and enjoy relationships with other in a manner that material purchases cannot provide. In fact, the nature of the activity matters less than the fact that we are actively engaged in it.

Short Adaptability Times

A significant component of why experiential purchases are more enjoyable than material purchases is that we have short adaptability times. For example, buying a television is often considered a significant purchase. As a result, we end up doing a lot of homework prior to purchasing the T.V. we want. We consider size, whether it can connect to the Internet, whether it can be watched in 3D. After all this work has been done and we buy one, over time it just becomes a regular TV as we adapt to it.

A research study conducted by Nicolao, Irwin and Goodman in 2009 demonstrated this. They gave research participants some money and asked them to spend it on either a experiential or material purchase. Following the purchase, they tracked the participants’ happiness over a two-week period of time. During the two-week span, they found that participants adapted slower to the experiential purchases than the material purchases. The main reason is that material purchases don’t change. The new TV you bought will still have the same dimensions and picture quality the last day of the year as it did the first day you bought it. If you go to a baseball game, it will be different than the last one you went to.

Each family vacation, baseball game, and happy hour stick out as unique experiences to us. In the research dialogue conducted by Dunn, Gilbert, and Wilson, 83% of research subjects reported mentally re-visiting their experiential purchases more than their material purchases. Experiences are far more likely to be shared with other people and other people are our great source of happiness, resulting in experiences having higher social value.

Next time you hear that money can’t buy you happiness, remember that it can. Choose the once-in-a-lifetime trip over the car upgrade that you don’t really need. You’ll probably get a good story out of it.

Further Maximizing Your Happiness

In addition to choosing experiences over material purchases, there are a few other principles that are essential to making happiness-maximizing choices.

1) Pay now and consume later. The entire credit-card industry is built to allow consumers to do just this. However, beware of the negative effects. It encourages short-sighted behavior by enabling consumers to easily pile on debt and eschew saving and budgeting. Increasing one’s debt and choosing not to save forces individuals into the dark side of compounding interest. The longer you wait to pay down your debt, the bigger the bill becomes. The longer you wait to start saving, the less you’ll be able to enjoy the miracle of compounding interest and watch your portfolio grow.

Opting to consume now and pay later eliminates another source of happiness: anticipation. I still remember working my first summer job at a basketball camp knowing that at the end of the week I’d have enough money to buy an iPod. I worked hard that week knowing that the moment I’d be able to buy the iPod with my own money would be special, a memory I’d cherish for a long time. When that moment came, it was special, and I was thrilled. That anticipation far outweighed the sadness I felt a few weeks later when I lost that iPod.

2) Consider the peripheral features of your purchase. In some ways, this builds on the theory of anticipation as a source of free happiness.

The most common example of this is the vacation home. Many of us romanticize the thought of owning a house on a lake. Wouldn’t it be great to be able to escape to a place where we could jump in the lake, lay out, and barbecue?  Well, would it still be that great if you considered the bug bites you’d probably get, the long drive each way, and the costs of maintaining a second home? We all like the thought of the vacation home in a vacuum, but the reality of the situation is often less glamorous than we’d like it to be.

3) Pay close attention to the happiness of others. Do as much research as possible before purchasing something. Sites such as Yelp, TripAdvisor, and Carfax allow us to make our decisions with more complete information. By understanding what other consumers thought about the product, we can eliminate a decent amount of the risk we take when making a new purchase without any outside information. Ask others what they thought of a restaurant before deciding to go there, how they enjoyed their last vacation and if they had any recommendations, or whether that new SUV is really all that it’s cracked up to be. It’s a simple task but doing so can save us from ourselves.

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Arun Sundaresan

Arun Sundaresan

Arun Sundaresan is a Portfolio Management Intern at Personal Capital. Arun has previously worked at Citigroup in London, and spent time at Personal Capital last summer. He is currently studying Finance at Washington University in St. Louis.

2 comments

  1. BARBARA FRIEDBERG

    Arun, Money also buys time, freedom, and security. The more money you have the more choices you have in life. Having a wealthy life is so much more than money in the bank. It’s ridiculous to work your whole life and not enjoy the journey along the way.

    Reply
  2. Kate Lawless

    Kate Lawless

    Fascinating post, Arun. It’s amazing how you turned an academic study into a total life hack. I recently read one of Kahneman’s books, Thinking, Fast and Slow, and found it truly useful – your advice here is even more practical. I definitely agree using TripAdvisor and other review sites is a great way to increase happiness because the planning beforehand is sometimes the best part.

    Reply

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