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Money and Happiness
By R.Kevin O'Keefe, CIMA®, AIF®

A new year is a time for reflection. As we evaluate the progress made toward achieving our financial goals, let us also evaluate the deeper purpose of those goals. Most of us would agree that money alone cannot buy happiness. Years ago I viewed a TED talk by Michael Norton titled “How to Buy Happiness.” The presentation was inspiring and helped me became more aware of the many possibilities of becoming happier—and how money can play a role.

I recently read a book review by Michael Kitces, advisor and blogger extraordinaire, on a new book: Happy Money: The Science of Happier Spending, by Elizabeth Dunn and Michael Norton. Here are some of the key points from Kitces’ review which I think are worth sharing more widely.

Historically, financial planners have tended to focus on strategies for accumulating more money, protecting assets, and determining how much can be spent… but not about how money should be spent. This book suggests that how we spend really does impact our enjoyment and emotional well-being. The Happy Money authors reveal five key ways that money really can “buy” happiness:

Can Money buy Happiness

1. Buy Experiences, Not Stuff. When asked prospectively whether they would rather spend discretionary money on material goods or on an experience, most people answer that they would rather buy the “thing” than the experience. Yet when asked whether they would rather give up the memories associated with a material purchase, or the memories associated with an experiential purchase, people were far less willing to trade in memories of the experience. Memories of experiences are more satisfying. The length of the experience is less critical than just having the experience; one study found that 4-day vacationers were as happy as 14-day vacationers, and overall the studies suggest that the best experiential purchases are shared, social experiences.

2. Make it a Treat. Spending is more enjoyable when you vary what you purchase; giving yourself opportunities to experience new things.  If you have the same treat every day, it ceases to be a treat. Gift cards might be “sensible and practical,” but giving a person something they wouldn’t buy for themselves is more likely to create happiness. And the treat doesn’t have to be large; we enjoy a larger number of smaller pleasures than fewer big treats.

3. Pay Now, Consume Later. The anticipation of paying up front but waiting to enjoy something can intensify the emotional experience. This may be especially true for experiential purchases, where the experience itself may be brief, but the anticipatory build-up extends the period of enjoyment and excitement for far longer.

4. Buy Time. There are many ways that spending just a little more can buy a lot of time—such as hiring a housekeeper or choosing a direct flight instead of one with a layover. Don’t obsess about how much time you have; just recognize that where there’s an easy opportunity to spend more to get back a little more time, it’s generally going to be a net positive for happiness.

5. Spend on Others. Perhaps most importantly, spending on others is a great way to use money to create happiness. “Prosocial spending” is actually far more correlated to happiness than how much we spend on ourselves. The more we feel our altruism is a result of our active choice, the more we feel connected; and the more we feel our giving has an impact, the more we want to give and the greater the happiness we derive.

 

At First Affirmative, we understand that the ways we save, spend, and invest can dramatically influence both the fabric and consciousness of society. We believe that in addition to the benefits of ownership, investors bear responsibility for the impactour money has in the world. Are you making conscious decisions about the impact of your consumer purchase and investment decisions? Learn more about Investing with First Affirmative.

Mention of specific companies or securities should not be considered an endorsement or a recommendation to buy or sell that security. Past performance is no guarantee of future results.

Posted: January 21, 2015