We’ve all heard the adage that money can’t make you happy, but most of us realize that’s not quite true. If you don’t have enough to cover the necessities, more money will most certainly have a positive impact. Conversely, the fact that on a given day Bill Gates has a few billion more than, say, Warren Buffett does not automatically mean he’s happier than the Wizard of Omaha.
Just about all of us fall somewhere between those that can’t cover the necessities and those for whom money is no object. We have enough to make some discretionary purchases, but certainly not enough to buy anything our hearts desire. So how, given these limitations, do we maximize happiness we derive from our wealth? It’s a question in which I’ve been interested for some time, and the New York Times ran an article here covering recent research on the topic, and the findings are interesting.
Before delving into the article, I’d like to explain what we’ve found in our work. For us, fundamentally, financial planning is about building a framework and identifying your options within that framework. This approach allows you to confirm whether you are on track to meet your goals or - if you aren’t - to identify their options in getting back on track. Lastly, having a plan is extremely helpful when things don’t go according to plan because the framework itself helps you understand the long-term impact of the unexpected.
The end goal of planning is to identify the best set of choices for you that will still allow you to meet your financial goals. We have found that going through this process helps you make the most of your financial resources and it also decreases financial anxiety.
Part of making the most of your financial resources is understanding what purchases are likely to maximize happiness, and in that vein, research points to the following:
Experience trumps material goods – research indicates that happiness from spending money on experiences – travel, education, concerts and the like – is longer-lasting than that from spending on material goods. There are several reasons researchers believe this to be the case and the article discusses these.
Lots of little purchases generate longer-lasting happiness than one big purchase – the psychological term for becoming accustomed to changes in lifestyle – good or bad – is hedonic adaptation. Research indicates that when it comes to purchases, we adapt to both large and small purchases, but the rate of adaptation isn’t directly proportional to the size of the purchase in question. Thus, with a lot of little purchases, it takes longer for the increase in happiness to dissipate.
Wait, and reward yourself – studies showed that anticipating a purchase increased happiness. By waiting to make a purchase – particularly if the purchase was a reward for a goal met – buyers experienced increased happiness. This dovetails nicely with advice any financial planner would give about saving for a purchase as opposed to buying on credit.
Ultimately, we view money as a means to an end, and that end is to increase the quality of life for ourselves and those we care about. Given that it’s a scarce resource for just about all of us, understanding how to maximize happiness when we spend can help us in achieving the overall goal of better quality of life.