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Money can make you happy if you know how to spend it!

The jury is still out but most agree that once your basic needs are met, every extra pound you earn has what’s known as a diminishing marginal utility. In other words, each additional pound you earn has less and less impact on your happiness. There’s a world of a difference between well-being and being well-off.

A recent book called Happy Money by behavioural scientists Elizabeth Dunn and Michael Norton looks at the science of smarter spending. They argue that money can make you happy but only if you spend it correctly and propose 5 key principles for making better decisions. Their approach makes complete sense. If you understand what makes you happy then you can make better choices about what to spend money on, and avoid being driven by short-term impulses that only last a short time.

In this article, I’m going to explore these 5 principles and how you can start applying them practically to your own life.

1. Buy experiences

We all live on a hedonic treadmill that leaves us continually wanting more. We think that buying the latest Apple computer or buying a new car will make us happy but this kind of happiness is short-lived. Soon that new computer and car become part of life’s furniture and the new “normal”. This new normal then becomes the benchmark from which we seek to make ourselves happier, so we are in a perpetual cycle of wanting.

Novel experiences on the other hand are different. They not only make you happy whilst you are looking forward to them and again during the experience, but they also make you happy afterwards as you reflect on them. So they make you happy before, during and after consumption with memories that last for a lifetime. Spending money on experiences such as holidays, theatre shows, museum trips and meals with friends has a much greater and lasting impact on happiness.

But not all experiences are equal. Before spending money on your next experience, why not ask the following 4 questions suggested by Dunn & Norton:

  • Does this bring me together with other people?
  • Will this make a memorable story that I will tell for years to come?
  • Is this experience in line with who I am or who I’d like to become?
  • Is this a unique opportunity and something I can’t compare to things I’ve done before?

2. Make it a treat

The key here is to defer and schedule pleasures. As explained already, we habituate to new circumstances very quickly. Even with a mouthful of cake, we know how delicious that first mouthful is but we notice the taste less and less with every mouthful. I’ve often pondered on whether this explains the success of tapas and our love for picnics!

Lots of small pleasures are much better than one big pleasure, and interruptions are great because they effectively help to wipe the pleasure slate clean. One unexpected example of this is with commercial breaks. Much as we think we hate commercial interruptions in our programmes, research has found that they actually improve our overall viewing experience! How about making that daily coffee break a treat rather than a ritual? Or saving TV to watch special shows rather than mindlessly putting it on every evening? An article in the London Metro this month showed that during 24 hours, the typical Brit watches a staggering 3.45 hours of TV!

3. Buy time

Wealth is not just money. Wealth is all those things that make our lives worthwhile. Time like money is something we can trade to help us do more of these meaningful things like visiting our families, going out with friends or even heading out for a run while others sit hunched at a desk.

I’m staggered that banks haven’t yet started looking at managing people’s wealth beyond money. And I salute people like Women Unlimited contributor Joanna Pieters, with her company Time Wizard which helps business owners rethink their time management, spend more time doing the things that really matter, and make best use of their talents.

We get too caught up shopping around to save money or working late to earn extra money, that we forget what has the greater value – time. When people tell me “time is money”, I reply “time is actually wealth and worth more than money. Money just buys me more time to do the things I love”.

4. Pay now, consume later

Debt is a psychological burden. If you’ve already consumed the service or product, you not only have debt from delayed payment but also have nothing to look forward to. However, getting into the habit of paying first and consuming later is difficult because intuitively we’re driven to enjoyment today.

By paying now and consuming later, we not only remove the burden of debt but also have great pleasure in looking forward to consumption. Anticipation is often more enjoyable than an experience itself! When we pay in cash for things, we have much more control over impulsive spending because we feel the pain of paying with the tangible handing over money. However, with the invention of debit cards, contactless payment and “one click to purchase” on places like Amazon, we have diluted the pain of paying.

5. Invest in / share with others

Most people think “if I’m happy, I’ll make others happy.” But in fact, it should be “If I make others happy, I’ll be happy and then I’ll naturally make others even happier in return.” Studies have shown that the best predictor of happiness is benevolence. It not only connects you to others and adds more meaning to your life but it also positively impacts your health. Happiness from benevolence is greatest when it is your free choice to give, when you have a personal connection to the recipients and when you think the gift will have a real impact.

The missing 6th principle

I believe Dunn & Norton missed a sixth critical principle – “know what you want and want what you have.” Earlier this year I interviewed a wonderful man called Wolfgang Herrlinger who runs the Athole Guest House in Bath with his wife. This guesthouse was voted No.2 in the world this year by Trip Advisor, so I went to meet him to understand the secret of his success and was struck by his insight into what makes people happy. He said “people are happy when they are ‘95% people’. They are content with getting something that is 95% right rather than searching for perfection. By searching for perfection, we make every choice sub-optimal by the process of comparison.” His words have stuck with me ever since.

Not only do we compare the opportunity cost of our choices but we also compare our choices to others. There will always be someone with a bigger house, a faster car, a better-paid job, or a more attractive partner. However, this doesn’t actually make your house any smaller, car any slower, your salary reduced or partner less attractive. And yet we feel less satisfied with what we have when we see someone else with something we perceive as better. The key to spending money well is wanting what you have and not having what you want.

What do you think? Let me know in the comments below!

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About Michelle Hawkins

Michelle is the Head of Happiness at The Flying Dodo. She designs spaces and experiences that promote greater Wellbeing and happiness in healthcare & hospitality using her knowledge of positive psychology, service design and behaviour change. Designing for happiness should be at the heart of every organisation. When people (staff and service users) feel happy, they become more resilient, motivated and engaged. To find out more about Michelle's story click on the icons below."

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2 comments

  1. nice Article thanks for sharing it.

  2. I agree completely! Nothing wrong with enjoying and liking having money and spending it on these kind of things keeps your life fulfilling.

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