Most of us think more about how to earn money than how to spend it. Implicit within this is the assumption that ‘the more money I earn, the happier I’ll be’. But there has been extensive research that shows that the way you spend money can make as much, if not more, difference to your happiness than how much you earn. Perhaps the best academic paper on this is ‘If money doesn’t make you happy, then you probably aren’t spending it right’ by Dunn, Gilbert and Wilson. It highlights eight evidence-based approaches to spend your way to happiness. Here they are:
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Most of us think more about how to earn money than how to spend it. Implicit within this is the assumption that ‘the more money I earn, the happier I’ll be’. But there has been extensive research that shows that the way you spend money can make as much, if not more, difference to your happiness than how much you earn. Perhaps the best academic paper on this is ‘If money doesn’t make you happy, then you probably aren’t spending it right’ by Dunn, Gilbert and Wilson. It highlights eight evidence-based approaches to spend your way to happiness. Here they are:
1. Buy Experiences Instead Of Things. We adapt to material goods very quickly as they are unchanging (your fancy phone is the same today as it will be tomorrow). Experiences, on the other hand, are constantly changing and unique. We also gain pleasure from mentally revisiting experiences. Finally, experiences are often shared with other people, which gives us more happiness.
2. Use Money To Help Others Rather Than ourselves. Humans are the most social animals in existence. Anything that increases social bonds has been shown to increase happiness, including spending money on others. Ironically, we think that spending money only on ourselves will make us happier
3. Buy Many Small Pleasures Instead Of Few Big Ones. Happiness is more linked to frequency rather than intensity, so small regular pleasures will give more overall happiness.
4. Buy Less Insurance. We overestimate how sad we will be if something bad happens, so we buy too much insurance. Humans are remarkably adaptive creatures.
5. Pay Now, Consume Later. The more usual consume now and pay later is the perfect recipe for racking up debts. But more importantly, by reversing the formula, we get the “free happiness” of anticipation as well as the eventual consumption of the thing.
6. Think About What You’re Not Thinking About. We expect a single purchase to have a lasting impact on our happiness. But our expectations will only be realistic when we start thinking about how a typical day in our future life will look like. For example, if buying a new house, think about the commute, the room you will end up spending all your time in and wifi/cable problems.
7. Beware Of Comparison Shopping. It makes you over-focus on the differences between the things you’re looking at, rather than their similarities. For example, you may end up buying a bigger house in the same neighbourhood rather than a smaller house because you’re comparing the number of bedrooms. Your happiness, though, may actually derive from the benefits of the neighbourhood, such as the local coffee shops and proximity to public transport. So you end spending more (to get the extra bedroom) without getting much of an increase in happiness.
8. Pay Close Attention To the Happiness Of Others. The 17th century writer François de La Rochefoucauld was correct when he wrote: “Before we set our hearts too much upon anything, let us first examine how happy those are who already possess it”. Do people who have bought what you are planning on buying seem that much happier from it?
Time to start spending in the right way
Bilal
Bilal Hafeez is the CEO and Editor of Macro Hive. He spent over twenty years doing research at big banks – JPMorgan, Deutsche Bank, and Nomura, where he had various “Global Head” roles and did FX, rates and cross-markets research.
(The commentary contained in the above article does not constitute an offer or a solicitation, or a recommendation to implement or liquidate an investment or to carry out any other transaction. It should not be used as a basis for any investment decision or other decision. Any investment decision should be based on appropriate professional advice specific to your needs.)