Why spending money can make you happier (but it’s not how you think)
Originally shared via Yahoo! Finance.
Turns out that how you spend your money is what improves overall happiness. Find out more here.
25 March 2023·8-min read
Spending money on experiences over physical items keeps us happier for longer. (Source: Getty)
With the rising cost of living, falling crypto, surging inflation and falling house prices, financial pressure is enough to get anyone down, but how important is money to our happiness? Turns out that money helps, but only to a limit.
In 2010, Nobel prize winners in Economics, psychologist Daniel Kahneman and economist Angus Deaton researched two aspects of emotional well-being - the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one's life pleasant or unpleasant, and life evaluation, the thoughts people have about their life when they think about it. They then raised the question of whether money bought happiness.
They concluded that more affluent people felt better about their lives. While this is hardly surprising, what was startling, was that people were no happier with higher wages. Emotional well-being rose with income but only to an annual salary of US$75,000, which comes in at a respectable US$102,500 in today’s money.
Sure, moving from an annual income of $75k to $100k can bring about a significant jump in lifestyle and outlook. The same, however, is unlikely to be as accurate when moving from $235k to $255k.
At no point, however, does more money make us sadder. On the contrary. It’s just that the rate at which it makes us happy decays very quickly. This means that if we’re spending with happiness as the goal, most of us should be far more interested in what we’re buying than how much of it we can buy. As legendary Harvard psychologist and acclaimed author Dan Gilbert said: “If money isn’t making you happy, you probably aren’t spending it right.”
Buying up
It’s hard not to get caught up in the narrative that happiness lies beyond the next bracelet, smartphone or air fryer. Together, we’ve built a society - and in large part, a global economy - around the relentless pursuit of ‘next’. But for the most part, it’s been brilliant. Two-hundred years of pursuing material upgrades have pulled billions of people out of poverty, improved human life by many orders of magnitude and allowed our species to achieve more than most would ever have thought possible.
However, the downside of this rapid ascent is that we haven’t had much time to get good at it. Two centuries is the blink of an eye in an evolutionary journey spanning millions of years. With this in mind, we shouldn’t be surprised to learn that our decision-making around lifestyle upgrades is often horribly flawed.
Many of our errors come down to an inability to predict what our future selves will want. After all, most of what we buy is for our future selves - the version of us that will be driving this car in three years, going on a holiday in July or eating lentil soup for dinner to pay for it. Unfortunately, our current selves are especially bad at predicting what our future selves will want. Even worse, we think we’re very good at it.
In behavioural science, this is known as projection bias, which causes us to assume that our current tastes, priorities and preferences will also be our future tastes, priorities and preferences. However, we fail to appreciate that our future selves will have a different context to our current selves, and what makes us happy now won’t necessarily make us happy then. Or, in words, projection bias is why middle-aged people spend good money getting tattoos removed that young people paid good money getting.
Spending for the win
Research into the ideal ways to spend money to be happy posits that the material possessions we crave for our future selves only give us the temporal illusion of happiness. In contrast, it is partaking in experiences that significantly extend our joy for longer.
In May, 2020, researcher Amit Kumar of the University of Texas and co-authors Matthew Killingsworth and Thomas Gilovich set out to determine how spending impacted happiness.
The team recruited 2,635 adults assigned to a material or experiential group. Material purchasers bought things such as jewellery, clothing or furniture, while experiential shoppers attended sporting events, dined at restaurants, or engaged in other experiences. The participants were sent random daily texts to monitor their emotions and purchasing behaviour. Firstly, they were asked how they felt “right now” using a sliding scale from “very bad” to “very good”.
Then, based on their group, participants were asked if they'd consumed a material purchase in the past hour. Those who answered yes were asked five follow-up questions:
Was the item consumed for work or play?
Was it for themselves or someone else?
Was it freely chosen or an obligation?
What was the purchase?
What was the purchase price?
The results conclusively demonstrated happiness was higher for participants who consumed experiential purchases versus material ones in every category, regardless of the cost of the item.
It comes down to when you buy an experience, you get anticipation and memories thrown in free. In contrast, when you buy a product, the product is all you get.
Spending money on a physical product only goes part-way to making us happy. (Source: Getty)
Let's do an experiment. Imagine you unexpectedly come into some windfall money to spend. What do you think would make you happier, a shiny new watch or a ski trip to New Zealand?
Let's start with the watch. You’ll likely invest hours, possibly weeks, narrowing a world of options down to the perfect designer timepiece. It’ll probably be fun and exhilarating. So, when you buy the watch, you’ll be treated to an initial rush of joy and endorphins as the retail assistant fastens it to your wrist. But, before you know it, that gorgeous new Panerai Radiomir Black Seal will become little more than how you tell the time.
Material purchases rarely generate long-term happiness because our joy invariably decreases to its pre-splurge level. It may explain why so many of us are stuck on the buying-new-stuff treadmill. We anticipate that every purchase or the pay rise that precedes it will make us happier, but the happiness never lasts.
However, memorable experiences like a ski trip to NZ boost our sense of well-being for much longer because of how we anticipate and remember them. For example, a 2010 study of 1,530 Dutch adults published in Applied Research in Quality of Life found that holidaymakers experienced their highest level of happiness in the weeks and months before a trip.
Not surprising if you consider the anticipation of a holiday when you’re daydreaming and imagining it. Your brain is enjoying being there for the weeks, months, or even years before you are physically at your destination. Even better, in your mind's eye, you’re enjoying a holiday in which the weather is always perfect, your children never misbehave, and the intricate logistics go off without a hitch.
Once the trip is over, memory also plays a critical part in the value equation. Regardless of the duration or day-to-day minutia of the trip, we’re wired to remember experiences based on the peak moments - the emotional high or low points - and how they end. Provided there are no significant negative peaks, a trip is likely to be remembered by the one or two best parts of it. Whether it was that incredible rooftop bar, the cruise around the harbour, or the day we spent at Disneyland. These moments add happiness for months and years to come, long after the suitcases have been unpacked and returned to the garage.
Hacking for happiness
Prioritising experiences over products is one way to boost your happiness, especially if those experiences are enjoyed with friends or family. Beyond this, a couple of other measures can also help.
One is to consider that we’re rarely the first person to purchase a particular car, bag, laptop or learjet. The same goes for taking the leap into a new job or a big-time promotion. So, rather than just assuming these things will make us happy, we can look to those who already have them as a more objective and possibly more accurate predictor. Do these people seem happy or significantly happier than they were beforehand?
It can also pay to look back on ourselves. For example, the last time we bought something similar to what we’re looking at now, did it make us happy? If so, how long did that happiness last?
Paying it forward
Finally, there’s research to say that one of the most selfish things you can do to boost your happiness is to buy thoughtful gifts for others. Spending like this provides anticipation and in-the-moment joy and strengthens our social bonds and relationships with loved ones, two of the most common predictors of happiness in every state of life.
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