Have you ever wondered if money can buy happiness? Studies show that people with a lot of money are more satisfied. However, when reporting happiness levels they aren't significantly happier than people with less. So you can buy happiness, but only if you're spending your money right.
Recently, I've been reading a lot of literature on money, happiness, and affective forecasting and it turns out there are a number of ways you can spend money to maximize your happiness.
Let's review a few of the key principles:
1. Buy experiences rather than things.
Researchers argue that you're more likely to get the most amount of happiness from every dollar you spend if you buy experiences rather than things. It's not that material things are inherently bad, but the best thing about experiences is that you can reflect on them and revisit those experiences again and again. Whereas materials things are something we adapt too.
For example, if you spend days or weeks picking out the perfect bamboo flooring you'll only get a temporary happiness boost. Eventually that boost wears off because as humans we adapt to new things in our lives.
Whereas, experiences give us the opportunity to get into "flow." And people are happiest when they are in the "flow." For example, if you've ever found yourself doing activity x and it seems like time magically disappears that means you are experiencing "flow."
2. Help others.
Humans are one of the most social animals on the planet and having strong relationships is the number one predictor of happiness.
For instance, many people can increase their happiness by engaging "pro-social spending;" meaning we get more happiness by giving money to charity. However, many people don't realize that donating money to a worthy cause will bring them more happiness. They are more apt to think that spending money on themselves will increase their happiness level. In essence people are making an "affective forecasting error;" meaning they wrongly predict what will make their future selves happy.
3. Rather than buying a few big pleasures, purchase many little pleasures.
It turns out that buying small pleasures will make you happier than a larger purchase. For example, going out to coffee with friends or having a beer with co-workers will happen more frequently than buying a two week trip to Hawaii. These are pleasures we can enjoy and savor everyday, rather than only once a year. Researchers also point out we're less likely to adapt to these small pleasures.
It comes down to a basic economic idea, diminishing marginal utility. Meaning there are diminishing returns in consumption. So the first unit of consumption of a good or service will result in more utility (or in this case happiness) than the second unit and so on. In If Money Doesn't Make You Happy Then You Probably Aren't Spending it Right, the authors refer to this concept as "the hedonic impact of pleasure." For example, the first bite of a very large cookie will be much more pleasurable than the last bite.
As researchers point out, this is about enjoying the "small mundane joys of life." And interestingly this capacity is reduced among very wealthy individuals; that constant access to any experience may undermine your happiness level. For example, one study showed that wealthy people are more likely to eat a piece of chocolate quickly and exhibit less pleasure while doing so.
4. Pay now, consume later.
The familiar mantra "consume now, pay later" is a bad idea and will bring you more stress and debt.
Pay for your stuff first. If you can't afford item X don't charge the expense on your credit card, wait until you can afford the purchase.
5. Think about what you're not thinking about.
Chances are you've probably thought about purchasing a dream home. But in all the thinking, have you thought about what you're not thinking about? Chances are your thinking is biased towards a euphemistic idea of your plans.
For example, you may have considered the benefits of home ownership, like the tax breaks a beautiful new porch, big backyard, and more. But most people (including myself) have a tendency to ignore the problems that come along with home ownership, like leaky faucets, cleaning the roof gutter or the expensive mortgage.
And like I've said before, happiness is in the small details of life. So if you buy a house that is old and in constant need of repair, it might not bring you a whole lot of happiness unless you enjoy spending most of your free time doing repairs.
6. Listen to the crowd.
We've all been told it's important to think for yourself, but there is something to be said for listening to the crowd and learning vicariously. Friends, family members, and large groups can tell you a lot about their experiences and what brings them joy and happiness.
For example, when you go to iTunes to purchase a movie it's a good idea to take a look at what the reviewers are saying. If you are considering watching movie x, and movie x got five starts, it's highly likely you'll enjoy the movie too.
Researchers point out, "the best way to predict how much we will enjoy an experience is to see how much someone else enjoyed it."