1. Experience Over ThingsThis is one of the most often cited findings found in personal finance blogs. We love to teach readers that experiences are better than material goods. The reason is that the studies say that you are much more likely to find happiness when you are engaged in your current activity. Interestingly, this activity doesn’t have to be a vacation, it just has to be something that doesn’t allow your mind to wander. This is why “time flies” when you are watching a movie, reading a book (or writing one), or having a romantic moment. Essentially, to find the truth behind the expression that “experiences equals happiness,” we have to be engrossed in our experiences. When we are completely engrossed by what we are doing, our minds don’t wander – and we often find satisfaction. In addition to this, material things (furniture, house renovations, jewelry, or new toys) are easy to get used to after the big purchase has been made. It doesn’t take long for that Persian rug to simply be the thing we put our feet on as we walk across the floor. Experiences, on the other hand, often provide satisfaction when we are currently experiencing them and also when we think back upon them. This is particularly true when we these experiences occur with people we love. If we want our money to buy happiness, we need to prefer experience of material goods.
2. Spend Money On OthersWhether money is given away to charity or to purchase something for someone else, it is well established that spending money on others produces increased happiness. This is obviously not the only reason to give to charity, but it is certainly one worth consideration. This is particularly true given that many people avoid giving money to charity (e.g. tithing to their church) because they think that if they spend the money on themselves, it will produce more happiness. Ironically, this simply isn’t true. Money spent on others leads to more long-term happiness. And this is one great reason why we need to balance giving with the desire to squirrel away every dollar that we can towards our financial independence. After all, if you are financially independent and have no one to spend all that time with, what’s the point? Saving all of your money can go too far. For those that don’t give money to others, you might find it is time to face the music. And when you do, you might also realize money can not only buy happiness for others, but it will help you find happiness, too!
3. Buy Smaller and More OftenWhen we purchase expensive items infrequently, we get used to it very quickly. There is a word for this in psychology called “adaptation”. You don’t have to study this to know that it is real, though. Walk around your house and take inventory of the items in it. See that dining room table? Or the lamp stand? What about the bed? Or that Persian rug we mentioned earlier? All of these things may have brought us an intense amount of happiness when we first bought them, but as we look at them now they are unlikely to sustain that happiness. The reason why is that we “adapt” to them. It moves our happiness set point. This is the same reason it is hard to fly first class and then to go back to coach. The more we have experienced something expensive and lavish, the less likely it is we will enjoy a less expensive item or experience. This happens with our car purchases, too – and I am the poster child of that with my Chevy SS. Interestingly, this can all be avoided if we opt to spend money more frequently on smaller purchases. This prevents our ability to adapt to something. For example, unlike that dining room table – which doesn’t change – drinking wine in the evenings with your spouse is unlikely to be the same every time. Likely, you’ll discuss something new that happened at work, or a recent success or failure. Oh, and did you hear that Shannon is marrying Robert? The moral of the story? Buy the bottle of wine and the evening conversation. Not the new dining room table.
4. Don’t Buy InsuranceFear sells, but money spent on fear doesn’t buy happiness. Think about driving a car or owning a home without insurance? The idea of “what could happen” is paralyzing in these situations. You need to insure against the calamities that are likely to leave you or your family in financial ruin. Every physician should have disability insurance (read here about the top ten questions about disability insurance). You should also obtain term-life insurance, home insurance, and umbrella insurance. However, after the big scary items are covered, you should then self-insure the rest. For example, when you purchase a garden tool or new phone, you should often forego the insurance. The reason for this is that the companies have run the numbers to determine how much to charge you so that they make out ahead. In addition to this, everyone reading this site should have 3 to 6 months of living expenses saved as an emergency fund. If you decide to no longer purchase long-term warranties and insurance on smaller new items, you’ll realize that the money saved could go into a bucket and then replace the one item that actually did break (instead of insuring the other 49 items that didn’t end up needing it). Then, you won’t have to live in fear. Instead, you’ll know the emergency fund is there, and that will provide reassurance and happiness.
5. Delay the PurchaseWe live in a “consume now, pay later” culture of credit cards. From instantly delivered movies to new-age food delivery, we have arrived at a time when immediate gratification is easier than ever. But is this a good thing? The answer is no. And there are two prevailing reasons why this is the case. The first is obvious, which is that anything put on credit or that places you in debt (including those student loans you should consider refinancing) must eventually be paid back. Racking up debt has destroyed lives. Having gone through bankruptcy as a kid, I can tell you that the damage is very real. Learning to avoid debt allows for a better financial situation, in addition to giving you time to think twice about the purchase if you cannot afford it right now. The second – and less obvious reason we should avoid immediate gratification – is that consuming everything immediately actually decreases our happiness. This strange phenomenon occurs because it gets rid of something that provides an innate amount of satisfaction, namely anticipation. In fact, studies have shown that the anticipation of an event often provides more happiness than the experience itself. It is the reason we look forward to holidays, vacations, and even the weekend. Yet, we often look back and realize that it wasn’t as good as we thought it would be. When we couple this with the idea that the experience has to end, we have a bit of a rebound effect going back to reality. For this reason, the researchers say that we should flip this paradigm on its head to produce more happiness with our spending. They argue that we should adopt a “pay now, consume later” mentality towards our spending. In this way, delaying purchases helps us build in some natural (and happiness producing) anticipation that is all too rare these days.
Take HomeI hope that this post helped you better understand how money and happiness are interconnected. While money doesn’t always buy happiness, if utilized in the right way, it can give you a better chance at finding it. Hopefully, we will spend your money on what actually produces happiness, and stop chasing things that won’t. (That “we” wasn’t accidental – I need to focus on this stuff as much as you!). If you enjoyed this post, make sure to check out the other posts in the Behavioral Finance Series!
I’d love to hear from you. Let me know if your experiences agree with the 5 ways to spend money that will make you happier!