5 Lessons in Happy Money

By Josh Gordon

My internship at Hilltop wrapped up in August, and I immensely enjoyed the opportunity to learn from my coworkers. One of the learning experiences I enjoyed as part of the internship was the summer reading list. One of the finance books I read was Happy Money by Elizabeth Dunn and Michael Norton (2014).

We’ve all heard the saying: “Money doesn’t buy happiness,” but what if using it wisely could bring you more satisfaction? That’s what Happy Money explores. Dunn and Norton make five primary recommendations:

1. Buy experiences
2. Make it a treat
3. Buy time
4. Pay now, consume later
5. Invest in others

Buy Experiences

We often get lured into the temptation of buying material things and hoping for a substantial amount of happiness. However, researchers have found that when they link spending choices and happiness, only one category matters consistently: leisure. Housing, automobiles, and physical things in our houses matter far less to our happiness than experiential purchases. As Dunn and Norton state, “you’re likely to get the biggest bang for your buck if the experience:

• brings you together with other people, fostering a sense of social connection
• makes a memorable story that you’ll enjoy retelling for years to come
• is tightly linked to your sense of who you are or want to be
• provides a unique opportunity, eluding easy comparison with other available options”

Positive memories of experiential purchases stick out far more in our memory than material purchases. A supporting story in the book tells of a woman who was willing to spend $200,000 on a six-minute flight to outer space instead of spending it on a new home because she felt it would bring her more happiness after a lifetime of dreaming about being an astronaut. While the authors are not exactly recommending that kind of expenditure, the point is that the experience meant far more to this woman than an upgrade in housing. Material possessions are quick to become essentially part of the background while the memories of the experience stick out more.

Make It a Treat

“The more we’re exposed to something, the more its impact diminishes.” An example is the child who wants ice cream and chocolate for every meal. If mom or dad gives in to the child’s whims – maybe my childhood was unorthodox, considering my father actually let my sister and me do this when my mother wasn’t home – the child quickly realizes the unhealthy mix of junk food loses its novelty and starts to make him sick to his stomach.

Buy Time

When contemplating purchases, we should look at buying things that change the way we use our time. While it may be tempting to use our time to maximize how much money we earn, research suggests people with more money don’t spend their time in more enjoyable ways on a day-to-day basis. They tend to use most of their time in the pursuit of money.

Volunteering our time can also make us feel like we have more of it, counterintuitive as that may be. We get the sense that if we have the time to help other people, then we must be doing a good job of taking care of ourselves.

Americans spend far too much time commuting (two weeks per year) and watching television (2 months per year) rather than with family and friends. Longer commute times may enable us to have a better job and nicer house, but those don’t have as big an impact on happiness as we tend to think. Thoughts of money cause people to be relatively cold and more focused on being rational, whereas investments in time connect us more to our sense of self.

Pay Now, Consume Later

“Everything looks perfect from far away.” Studies show people are happier in the weeks leading up to an exciting trip than the weeks following the trip. This is because the uncertainty of the future allows us to see it in a more positive light, envisioning the details we would like to happen. Therefore, adding a delay before you consume something after buying it can lead to more happiness due to the increased anticipation.

The temptation is generally to consume now and pay later, because that gives us instant gratification and pushes off the pain of spending. Credit cards have given us the chance to take this to the extreme and rack up ridiculous amounts of debt. To flip this in your favor, organize your luxuries to spend now and consume later.

I’m looking forward to taking advantage of this on my upcoming honeymoon at an all-inclusive resort. We’ll pay for everything upfront, and everything we consume on the trip will feel “free,” with no financial pain for getting another drink or ordering something extra at dinner.

Invest in Others

One researcher in Vancouver did an experiment where she gave strangers envelopes with money ranging from $5-$20 inside, along with instructions to either spend the money on “yourself” or “someone else”. People who spent the money on someone else reported feeling significantly happier than people who spent the money on themselves. Researchers also found the average American had a 10:1 ratio of personal to “prosocial” spending (gifts for others, donations to charities). However, individuals with a smaller ratio reported being happier.

One exception found by researchers is that the benefit of financial generosity does not apply when one feels forced to give. Giving under coercion or compulsion actually had the opposite effect, with givers feeling worse when they did something good. It must be a choice to give.

And similar to the reasoning in regard to volunteer time, giving money away invokes a sense that you have your own matters taken care of.

During my Hilltop internship, I learned a lot about personal financial planning and working in the financial advice business. But I’m also looking forward to applying these Happy Money lessons in my own life.

This material is provided as a courtesy and for educational purposes only. Please consult your investment professional, legal or tax advisor for specific information pertaining to your situation.

Hilltop Wealth Advisors does not endorse any publications mentioned in this post, nor the views of their authors. Any third-party materials mentioned are for reference only.