Regardless of how involved you are in finance, there’s a good chance you’ve heard of a notorious study that, supposedly, said something like “…money only makes you happier up to a certain amount, and beyond that threshold, it really doesn’t lead to more happiness.” If true, this phenomenon would certainly go a long way toward explaining why we all know wealthy people who don’t seem happy. It also begs the question, as a financial advisor, why am I spending my days trying to help people by investing if having extra won’t make them happier? I decided I needed to find the article from this study and figure out if we’re all just wasting our time.
The article, “Will Money Increase Subjective Well-Being?” by Ed Diener and Robert Biswas-Diener, is much more nuanced than people say. What it ACTUALLY says is that outcomes for the effects of money on well-being (i.e. “happiness”) were varied and dependent on the individual person’s values. Specifically, the author’s found that “…people who prize material goals more than other values tend to be substantially less happy, unless they are rich.[1]” It sounds like wealth can contribute to happiness and wellbeing if you spend it wisely. Additionally, the material things we do prize should be proportional to the amount of money we have. So, what is wise spending? And more specifically, how can you spend your money in a way that fosters wellbeing and joy?
When Was the Last Time You Considered Joy?
Life is so busy, most people never take the time to think about what I refer to as their “joy per dollar”. Most of us know our car’s gas mileage, but how many of us have asked the question, “How can I get the most joy out of the money I have?” People are good about thinking in terms of using their income to cover obligations or material needs, but it’s easy to overlook joy. So, I’ll share several principals that will help you become a “happy spender”.
Happy Spenders Do Both Carefree and Thoughtful Purchases Well
It’s obvious that, in some circumstances, carefree spending can lead to happiness, and in other circumstances thoughtful spending is the best way to go. What’s not so obvious is how and when to engage in each. Here are four important principals to help you make both carefree and thoughtful spending work for you.
- It takes thought to make purchases that foster joy.
- People are your greatest source of happiness.
- Delaying gratification leads to more happiness.[2]
- Carefree and careless are NOT the same thing.
It Takes Thought to Make Purchases that Foster Joy
We’re all naturally drawn to tangible, big-ticket items. Large purchases can be fun, but often times a day sprinkled with life’s little pleasures can make us happier than an occasional big pleasure. This is true for a couple of reasons. First, we all adapt to a higher standard of living quickly. Picture how excited you were to move into your first apartment. Would you be excited to move into that same apartment now? Probably not because over the course of your working life you’ve adapted to better housing. There’s also a phenomenon called “diminishing marginal utility” which just says that eating two cookies doesn’t lead to twice as much happiness as eating one cookie. Each additional cookie (or pleasure) has less and less impact on happiness. Feeling depressed yet? Here’s the good news, when it comes to consumption, happiness is more strongly associated with the frequency of something enjoyable rather than the intensity. Meaning, if you enjoy the things that make you happy regularly, it doesn’t take as much. Another important reason it takes thought to make purchases that foster joy is because people don’t fully appreciate just how important relationships are to their overall wellbeing.
People Are Our Greatest Source of Happiness
Studies have found that people think spending money on themselves makes them happier, but that’s just not how it works. Since people are such social beings, the quality of our relationships is crucial to our happiness. As a result, spending money in a way that fosters relationships tends to make for happier spending. In fact, a study that surveyed how much people spent on themselves versus how much they spent on others found that the happiest people spent larger proportions of their income on others. So, it really is better to give than receive! (Dunn et. Al)
Delaying Gratification Leads to More Happiness
While carefree spending is important, when it comes to enjoying money, it can’t be your primary mode. I know this goes against the grain of our “get it now” culture, but research shows that instant gratification undermines wellbeing in a number of ways. The first reason is fairly straightforward; “buy now pay later” can lead to shortsighted purchases which tend to undermine longer-term goals. There are other, less intuitive, reasons delaying gratification leads to more happiness, however. The “Get it now” mentality also reduces anticipation which can be thought of as “free” happiness. Sometimes, the anticipation of an experience can be even more enjoyable than the actual experience. Going back to the cookie example, research has shown that the person who eats a cookie as soon as they receive it, enjoys it less than the person who saves the cookie for later. The second person gets to enjoy the cookie and the anticipation.
Lastly, delaying gratification creates time for reality to set in. It’s been shown that when people consider a purchase, they tend to overlook the details. For example, a person considering an R.V. might initially focus on the peaceful sunsets and family time around a campfire, but completely miss the headaches associated with maintaining and storing such a large item. The devil is in the details and time gives you a much-needed opportunity to consider the overall experience associated with a given purchase. It’s important to consider both the monetary costs of a purchase and any potential drain on your time and energy.
Carefree and Careless are not the Same Thing
It’s important to point out that I’m encouraging carefree spending, not careless spending. Careless spending is placing such a high value on things that you are willing to spend money on them even if it will cause you stress and worry later. Carefree spending is purchasing things you can afford, not because they’re contributing to some larger goal but just because you enjoy them. For a purchase to be truly carefree the value that you place on it should be proportional to your wealth. A billionaire can buy an exotic car and it would be considered carefree. For more average folks, it might be a weekend at the beach or a cappuccino. If you place high value on things you can’t afford, you’re going to be miserable until you get them, and worried about money afterwards.
How to Do Carefree and Thoughtful Well
It’s so important to remember that it takes thought to make purchases that foster joy. With that in mind, you can use several strategies to maximize your joy per dollar. First, give yourself time to think about your larger purchases or goals. It’s not enough to envision a bigger house, you have to consider the potential headaches like a longer commute, a pushy homeowner’s association, or more expenses. To do this, don’t think of the purchase as a moment in time. Think about owning the purchase day in and day out. Will it create enjoyment again and again or will it be fun…at first? A high-end vacation to Hawaii could be a blast, but maybe not if you have to skip going out with your friends for months to pay for it.
Another helpful strategy to maximize your joy per dollar is carving out room in your budget for carefree spending, with no questions asked. As I showed above, spending on smaller, frequent, and social purchases significantly contributes to happiness so budget accordingly. Set aside a reasonable, but meaningful, amount every month so you can grab a cup of coffee or go catch a movie with a friend. By setting aside a predetermined amount you can benefit from carefree spending without worry or guilt because you can be sure it’s not undermining your more long-term, thoughtful spending.
Conclusion
Money can absolutely contribute to wellbeing and joy. The trouble is people are often drawn to the wrong types of purchases. To enjoy your money, prioritize spending that gives you the greatest joy per dollar. Spending without guilt or worry on frequent, small pleasures, especially with friends and family, is a great way to be a happy spender. At the same time, be thoughtful about the experience of owning something long after you’ve paid for it. Taking time to think through your large purchases and planning your spending will allow time for anticipation to build, which compounds the excitement, and contributes to your wellbeing and joy for years to come.
[1] Diener, E. & Biswas-Diener, R. (2002). Will money increase subjective well-being? Soc. Indic. Res 57, 119-169.
[2] Dunn, E.W., Gilbert, D.T., & Wilson, T.D. (2011). If money doesn’t make you happy then you probably aren’t spending it right. Journal of Consumer Psychology, 21, 2.