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Can Money Buy Happiness?

Can Money Buy Happiness?

Does money buy happiness? It’s an age-old question with a modern day answer: It depends on how you spend it. Michael Norton and Elizabeth Dunn’s book Happy Money: The Science of Smarter Spending, gives us a peek into three simple strategies to spend your way to happiness:

  1. Spend money on someone else: Gift varying amounts of money to strangers and tell them to spend it on themselves or others. It turns out when money is spent selflessly, there’s a marked improvement in happiness versus those who just spend on themselves. Buy a cup of coffee for a stranger and see if you miss that three dollars.
  2. Buy experiences, not stuff: Money spent on experiences is more emotionally involving and provides greater fulfillment. Avoid buying “stuff” or “things” and instead spend it on a nice dinner, weekend getaway, or learning a new hobby. The lingering emotional benefits may surprise you.
  3. Give it away: Dunn and Norton urge us to follow Warren Buffett’s lead and give away as much as we can. Although Mr. Buffett plans to give 99% of his wealth away to philanthropy (and for the rest of us mere mortals that would be financially impossible), giving to charitable causes can bring a big boost to our emotional well-being. 

The “B” Word

Talk of spending inevitably leads to talk of budgeting. Many people’s lives have been greatly improved through strict budgeting, but it’s also one of the most dreaded concepts clients confront. What if you’re already a good saver? Is there a compromise or workaround that promotes happiness while still being responsible? If you have your financial house in order, sometimes you don’t need to set as rigid a target for spending. Sometimes, just knowing where your money is going is enough.

Track Your Spending

By using websites like Mint, you’ll get a clear picture of where your money goes over time. First, you’ll need to add your credit card and bank accounts to your automated spending tracking tool (like Mint) so your spending information can be imported. Then, set a weekly calendar reminder and spend five minutes placing “uncategorized” transactions into their proper category. Treat it like a game and you might actually enjoy it—it’s like Tetris but better!

After a year, play with the “trends” tab to see where your money went. You’ll likely be blown away when you see how much you’ve spent on dining out and groceries (especially if you hide your whiskey or wine purchases in the groceries category). 

Will this instantly change your current spending patterns? Probably not. But there’s genuine happiness in at least knowing where you can cut spending later if needed.

Budget Only Where It Matters

Everyone has spending blind spots. For some, it’s impulse shopping. For others, it’s never being able to say no to a family member’s request for a “loan” or a cash gift. Think about what your blind spots are. In a given year, there’s a very high chance you’ll look back and wish you had done much more or much less of some of them.

To address where you need to control your spending, create additional savings accounts and nickname them “travel” or “charity” or whatever inspires you. Each account will receive automatic monthly transfers from your checking. Then, eat what you like, and update your wardrobe when holes appear. Simplify your life and take the stress out of budgeting while still forming healthy spending boundaries.

The Science of Spending

Studies show that the frequency of pleasure is more closely related to happiness than the intensity of pleasure. That means shop for lots of little things (or experiences) rather than a few big ones. Buy that new widget or doodad and book several fun day trips or short outings.

Also, consumers who don’t delay their gratification and hastily use credit for purchases end up robbing themselves of a great source of enjoyment: anticipation. Delayed pleasure can be just as intense as actually buying something, so accrue that additional pleasure by looking forward to it. Think of it as compound “happiness” interest. 

Spending from Your Nest Egg

The 2008 recession was emotionally difficult for many investors, especially older ones nearing the point they would need their nest egg to replace work income. Many ended up treating their portfolio like an ATM. Whether it was a big vacation, a sudden medical expense, or holiday shopping, they spent far more than they earned in the years one should still typically be making contributions. 

Unchecked spending habits can lead to great unhappiness and a serious case of the blame game (towards a partner, a financial advisor, Wall Street, past investment choices, and more). Some clients have even divorced because they had such wildly different views about how much gratification they should defer to future years.

If you’re still in your working years, there’s almost no reason to make ATM-like trips to your nest egg. Create an emergency plan with your financial advisor to give yourself a designated way to access cash if a surprise expense arises. A “rainy day” fund at your bank generally does the trick. If you have no choice but to make a spontaneous withdrawal from your nest egg, consider doing what people do when they borrow from their 401(k) accounts. They are forced to pay them back (with interest!). 

True Bliss

Remember, any money you spend, whether it’s from your checking account or nest egg, is money you’re taking from your future self. Reach out to an Abacus advisor today to build your perfect spending and savings plan. You’ll find peace, comfort, and joy now, and your future self will be more than happy to have something to spend later.

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