How to Spend Your Way to Happiness

A photo of a pregnant woman meditating for article on mindful spending

You know the old adage “money can't buy happiness”? Researchers Elizabeth Dunn, Dan Gilbert, and Timothy Wilson say it's a myth. Drawing on empirical research, they've identified key ways that people can get more bliss for their buck.

The link between money and happiness has been studied for decades, and the result is always the same: Money does buy happiness — but less than most of us think. After a certain point — having basic needs met and a little “play money” in your pocket — having more money doesn't create more happiness. But Dunn, Gilbert, and Wilson wanted to know why.

The fuzzy, feel-good answer is that the things that make us the happiest — love, friendship, and the like — can't be bought. While the authors admit this is a lovely sentiment, they also found that it's wrong. They published the results of their research in a paper aptly titled, “If Money Doesn't Make You Happy Then You're Probably Not Spending It Right.”

The authors point to studies that show how money gives people:

  • more control of their lives
  • more free time to spend with loved ones
  • longer, healthier lives
  • a buffer against stress and harm

These are all elements that have been identified in studies as sources of happiness. So, if rich people are able to afford top medical care, a summer in the south of France with their family, and seeking out a meaningful career — elements of a happy life — why aren't they proportionately happier than those who have less money?

Humans don't know what will make them happy

The main reason is that people don't know how to spend their money to cultivate happiness. “Money is an opportunity for happiness,” Dunn and her colleagues write, “but it is an opportunity that people routinely squander because the things they think will make them happy often don't.”

Whenever we're presented with a choice, it's human nature to try to predict the future outcome of each option. But the researchers found quite a few studies that show that humans are horrible at making accurate predictions.

  • For one thing, we underestimate how easy it is for us to adapt to our circumstances — good or bad — and our predicted scenarios lack important details.
  • Second, the context in which we make our predictions is not the context in which we will have the future experience.

These two factors mean we are awful at predicting what will make us happy, how happy it will make us, and how long it will make us happy.

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How to spend your way to happiness

An individual might be unable to forecast what will make her happiest, but luckily empirical data can make up for human error. The researchers found eight key ways that spending can increase happiness. We'll cover the first three today (and the last five next week).

Tip #1: Buy fewer material goods but more experiences.

Experiences keep us in the here-and-now, and often only get better with age. When you buy a material good, however, you adapt to it more quickly and witness your purchase becoming worn and less “shiny” over time. We anticipate and remember experiences more than things — you probably fondly recall the Thai cooking class you took with your spouse on your second date, but never give much thought to the living room furniture you bought last year.

Also, it's more difficult to obsess about the option you didn't take with experiences, and ruminating over roads not traveled is a fast path to unhappiness. For example, you're deciding between two car models, you make your purchase, and then you see an article in Consumer Reports showing the other model to be far superior. Ouch. Suddenly you're a lot less happy with your shiny new toy. But if you're deciding between a wine tasting trip in Tuscany or climbing Machu Picchu in Peru, can you really go wrong? It's much more difficult to compare two wholly different, but probably equally amazing, experiences. It's unlikely you'll regret either option.

I've always liked the idea of spending on experiences, but I never thought about how it can curb buyer's remorse, which can be a huge source of unhappiness for me. I'm a planner and a researcher by nature, which means I am usually trying to buy the best item at the best price. I hate finding out that the Blu-Ray player we finally settled on (after two years of limping our DVD/VHS player along) doesn't do everything advertised. But with experiences, I'm spared that. My birthday is next week, and I'm deciding between the new farmhouse-inspired, Japanese fusion restaurant and the sophisticated-yet-casual locavore cafe with a European flair. I don't think I can compare or go wrong — the experiences would just be different.

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Finally, the researchers point out that experiences are usually shared with others, and other people are one of our greatest sources of happiness.

Tip #2: Use money to help others.

I loved this tidbit from the paper: Only termites, eusocial insects, and naked mole rats create social networks as complex as the ones humans construct, and we are the only known species to include unrelated individuals in our networks. In other words, even the most introverted among us are still highly social creatures in comparison with every other species on the planet.

One study showed that, even after controlling for income, people who spent more money on prosocial spending (gifts for others and donations to charity) were happier than those who spent less. Personal spending (bills, expenses, and gifts oneself) was shown to be unrelated to happiness. Another study showed how the rewards of prosocial spending are detectable at the neural level — activating brain areas typically associated with receiving rewards.

The authors write:

Although the benefits of prosocial spending are robust across cultures and methodologies, they are invisible to many people. Surveying UBC students…a significant majority made an affective forecasting error: they thought that spending money on themselves would make them happier than spending on others. Indeed, simply thinking about money has been shown to undermine prosocial impulses, making people less likely to donate to charity or help acquaintances. Although money can and should promote happiness, the mere thought of money may undermine its ability to do so.

This is one area where we seem to make inaccurate predictions about spending and happiness.

Tip #3: Buy fewer expensive pleasures and favor of more frequent, less expensive ones.

Because of our ability to adapt so quickly to change and new things, there's evidence that indulging in more frequent and less expensive pleasures will make us happier than less-frequent, luxury goods.

Small pleasures are usually a different experience every time. Things like a massage, a drink with your friends, or tickets to a local performance are never exactly the same, and therefore it takes more time for us to adapt to them. If you decided to forgo those pleasures to afford a brand-new set of living room furniture, you might find your self adapting to the furniture and the newness and excitement wearing off faster than you thought it would. You sit on it every day, it's the same experience every time — and is that a juice stain on the cushion?!

Another study showed that “breaking up” a pleasurable experience, rather than receiving it all at once, increases happiness. In one study, one group of participants was given a long, continuous massage, and another group was given two shorter massages with a break in between. Before the massage, the majority of participants predicted that they would rather have one continuous massage (I know I would!). Turns out that those who had the shorter massages with the break found the experience was more pleasurable and they'd be willing to pay more (Oh. I guess I wouldn't.)

I think this is why telling folks to give up their lattes is great advice on paper, but ineffective in real life. For example, I love coffee. Love. I make it at home now that I work at home, but when I had a 9-to-5 gig, when I had to face days of traffic and meetings and office politics and is-it-Friday-yet, my overpriced latte from the coffee shop was one of the highlights of my day. Really. I was Norm and this was my Cheers — everybody knew my name; everybody knew my drink. Having that warm, frothy beverage in my hand made clocking in at the cube farm a little more bearable.

Why is shorter and more frequent better? The researchers found that these little pleasures, like our morning cup of java, allow us to enjoy more first moments, which are tied to our perceptions of happiness. It's like having ten first bites of cake, as opposed to eating the entire cake in one sitting.

Tip #4: Don't buy extended warranties.

“If the bad news is that we adapt to good things, the good news is that we adapt to bad things as well,” write the researchers. Studies on how people deal with trauma have shown that people are less fragile than they think when faced with tragedy, and they overestimate how negatively it will affect them.

One result is that we are more vulnerable to purchasing insurance we don't need, such as extended warranties, which are usually overpriced and provide more benefits to the seller than the buyer. Last year, for example, I bought a mouse for my laptop that would relieve my wrist pain. The item was about $30. The insurance I was offered was $8. I've had this mouse for almost a year, and I've dropped it on a hard surface and the ball has popped out and rolled across the room (to the great amusement of my cat) many times. But it still works just fine.

Essentially, they write, extended warranties are “unnecessary emotional protection.” Why? Our psyches are great at rewriting history to avoid self-blame and regret. Sounds like a negative, but the upshot is that we experience less regret than we predict. We have a built-in “unhappiness-reducing mechanism.”

What's more, unnecessary insurance not only doesn't increase our happiness, but it can actually reduce it. In one study, participants were offered a choice of prints of paintings. After making their selection, half were offered a generous exchange policy ― they could swap their print for another at anytime in the next month. The other half were told their choice would be final. Participants predicted they would be equally happy with their choice, with or without the exchange policy, but in reality the ones who didn't have the exchange option experienced an increased appreciation of their print. The other group liked their selection no more and no less than before.

We buy extended warranties and return policies in an attempt to shield ourselves from buyer's remorse, but research shows they don't add to our contentment, and might actually detract from it.

Tip #5: Delay consumption.

Our culture likes to buy now. Credit cards allow us to purchase today with tomorrow's income. We constantly hear “no money down” and “no payments for a year” offers on TV. Thanks to the Internet, we can make digital purchases instantly.

The researchers found two key ways these changes have reduced our happiness. First, it can lead to shortsighted spending behaviors that often result in financial ruin. I have a friend who spent his way into bankruptcy. In his case, it wasn't medical bills or some other catastrophic event that wiped him out — it was a luxury car on lease, the newest iPhone, and the biggest LED screen TV on the market that sunk him. The paper cites several studies that show that when people are impatient, they wind up less happy in the end.

Second, buying now and paying later means there's no anticipation, and it turns out that anticipation is a source of happiness. Sometimes anticipation is an even bigger source of happiness than the even itself. One study showed that people who devote time to anticipating enjoyable experiences describe themselves as happier than those who don't, and another showed that thinking about future events evokes stronger emotion than thinking about those same events in retrospect.

In addition to anticipation, delaying a purchase also can change what choice you make. Participants in one study were asked to select a snack — an apple, banana, paprika-flavored crisps, or Snickers bar. When asked to pick one to eat immediately, the overwhelming majority chose something unhealthy. When asked to pick one to eat next week, they chose a healthier option.

Our immediate wants are swayed more heavily by emotion, which is why the 30-day spending rule can be so effective against impulse buys.

Tip #6: Consider how peripheral features of Stuff may affect your everyday life.

I sometimes daydream about owning a small house in Mérida, Yucatán. It's a beautiful city with a rich history, and close to Mayan ruins and gorgeous beaches. But there's more to owning a getaway in Mexico than sunny beaches and Yucatecan cuisine — navigating property ownership in a foreign country, arranging for someone to look after the place in our absence, dealing with repairs and upkeep upon arriving for our “vacation,” and more.

One study showed that the farther away an experience is in terms of time, the more abstractly people think of it. It sounds romantic when daydreaming about it 20 years down the line, so we overlook important details that will affect our happiness.

In addition, there's evidence that the daily ups and downs have a far greater effect on happiness than a single purchase — and we overestimate the effect of the event on which we're focusing (with those rose-colored glasses). Buying the house in Mexico probably won't have a lasting effect on my overall happiness because, like anything, there will be positives and negatives. There will be headaches and hassles, as well as the joys of belonging to the local community. In the end, I think I'd rather just rent a place if we're going to stay for an extended period.

Tip #7: Beware comparison shopping.

Comparison shopping is a smart practice that saves you money, but sometimes it distracts us from the attributes that are most important to us. Instead, we focus on attributes that distinguish one option from another.

Someone in the market for a new home, for example, might want something affordable with a big yard for the kids and an open kitchen. But after viewing 20 homes, some of which are probably outside of their stated maximum purchase price, suddenly the homes that fit their original needs aren't as exciting. They might forget how important a large yard is after being dazzled by an amazing view. Maybe they'll take out a bigger loan to afford something that wasn't important to them when they started out.

When comparison shopping for a new camera, I experienced this problem. Suddenly features that I didn't care about initially became more important because they distinguished one model or brand from another. (Next time I might make a list of what matters to me — actually write it down — and compare models based only on those attributes. Could be an interesting experiment.)

Tip #8: Pay attention to the happiness of other people.

We like to think we're unique, but studies have shown that the best way to predict what we will like is by seeing what other people liked. From the paper:

…Gilbert, Killingsworth, Eyre, and Wilson (2009) asked women to predict how much they would enjoy a speed date with a particular man. Some of the women were shown the man's photograph and autobiography, while others were shown only a rating of how much a previous women had enjoyed a speed date with the same man a few minutes earlier. Although the vast majority of the participants expected that those who were shown the photograph and autobiography would make more accurate predictions than those who were shown the rating, precisely the opposite was the case. Indeed, relative to seeing the photograph and autobiography, seeing the rating reduced inaccuracy by about 50%.

In other words, if you are a female and the majority of women in your age group rated a movie favorably, chances are good that you'll enjoy it, too. It's worthwhile to check out user ratings and reviews before making a purchase.

Money can buy most of what makes us happy

“Money can buy many, if not most, if not all of the things that make people happy, and if it doesn't, then the fault is ours,” write the researchers. We are bad at predicting what will make us happy, and often spend in ways that not only don't increase happiness, but actually decrease it.

Personally, I think the studies about comparison shopping might alter how I seek out the best deal. I very much identify with the distracted feeling the researchers describe, and I have experienced situations where I can't even remember which attributes mattered most to me. Sometimes I give the whole thing up and don't buy anything (not necessarily a bad outcome). How might you change the way you buy based on these principles? Have you made a purchasing choice that actually decreased your feelings of overall happiness?

More about...Psychology

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