Wise Ways to Spend Your Money
They say that money can’t buy happiness. There is much to be said for this little piece of wisdom. But it’s not completely true.
The relationship between wealth and well-being is pretty weak. Poverty, obviously, is very bad. It’s hard to be happy when you’re starving or have nowhere to sleep. (In this article I recommend a solution to poverty.) But all the evidence suggests that increasing your income reliably increases your happiness only until you are “freed from subsistence level needs for food, clothing and shelter” (Easterlin 2001, pg. 40). Once you have enough money to provide for your basic needs, more will have very little impact on your happiness.
This flies in the face of common sense—not to mention the received wisdom amongst economists. Economists generally assume that people are rational agents who will spend additional resources on things that they want. Since everyone (pretty much) wants happiness, this means that more money should mean more happiness. However, this doesn’t appear to be true.
To illustrate, between 1972 and 2006 the average American’s household income (adjusted for inflation) rose by 37%, while average scores on measures of psychological well-being rose by only .07 points on a 10 point scale (Easterlin et al. 2010). That’s basically no change at all. And this isn’t a distinctively American phenomenon. Between 1990 and 2010 per capita GDP in China rose by a whopping 400%. During that same period, life satisfaction dropped (Tang 2014; Li & Raine 2014). In other words, despite massive economic growth, the average Chinese person is less happy today than a couple decades ago.
The main reason why the relationship between money and happiness is so weak is because the most important things in life are healthy and loving relationships, fulfilling work, a sense of meaning, purpose and contribution. And these don’t cost money.
That said, perhaps part of what’s going on is that people don’t actually know which expenditures will make them better off. In other words, perhaps the extra money do people good—if only it weren’t being thrown away on the wrong things. (Check out my article on consumerism for more on this point.) So people with more money could be happier if only they know what to do with it. In this article, I share a few empirical findings about how you can wisely spend your money.
Spend on others
The best thing you can do with your money is spend it on someone other than yourself. I don’t just mean the morally best thing. Though, clearly this is a huge moral concern.
One’s prosocial spending (that is, charitable donations plus gifts) as a proportion of one’s expenses predicts one’s score on a range of happiness measures (Dunn et al. 2014). This is after controlling for individual wealth. Thus, it’s not that rich people are able to give more money away while still spending a lot on themselves. No matter how wealthy you are — once you’re above subsistence level — giving away more money will make you happier. This finding has been replicated all over the world, in 120 countries (Aknin et al. 2013).
The causal relationship here is likely bidirectional. Spending on others makes people happier. And being happy leads people to be more charitable (Cialdini et al. 1987). It’s a virtuous cycle, or “upward spiral” of well-being.
Given that 767 million people live on less than $1.90 per day, I strongly encourage readers to give some of their excess money to them. (I’ll just leave this link to GiveDirectly right here.)
Spend on experiences rather than things
If you spend money on yourself, it’s best to spend on experiences rather than possessions. (See here for a nice review of some of the evidence.) It’s better to take a vacation, for instance, than to buy a new car or expensive clothes.
In one study, when asked to think back to recent purchases of $100 or more, participants consistently reported getting more happiness from their experiential rather than material purchases (van Boven & Gilovich 2003). They also experienced more anticipatory pleasure when thinking about experiential rather than material purchases. In other words, people generally get more out of looking forward to and looking backward on experiences rather than material acquisitions. (Gilovich et al. 2015 also found that experiential purchases come with less buyer’s remorse.)
Experiences are thought to be more enjoyable than things because they facilitate social relationships, are less likely to induce social comparisons, and help to shape our identities. When people spend money on activities, they typically experience them with others (Howell & Hill 2009). Healthy and loving relationships are hugely important for wellbeing. Things, on the other hand, we often consume or enjoy alone. Another factor is that, because it’s hard to compare my experience with yours, spending on experiences invites fewer invidious social comparisons. One interesting finding is that people who think about experiential purchases, rather than material ones, were less upset to find out that others had gotten a better deal (Carter & Gilovich 2010). Lastly, the things that we do and see get integrated into our sense of self. We are — in a sense — the sum of our experiences. Thus, spending to improve or diversify those experiences has a more significant and lasting impact on us than does spending on objects, from which we are inevitably separated.
By the way, “experiential” purchases can sometimes be purchases of objects. For instance, buying a guitar is a bit like buying the experience of playing it. Compare this with buying designer clothes. Of course, one could say that this is similarly like buying the experience of wearing the clothes. But, the key distinction has to do with what one does with the purchase. Do you want to buy the thing as a means to some other end (e.g., to impress people with your sartorial sense), or for something more intrinsic and experiential (e.g., to play the guitar)
Spend money to save time
“Time affluence”, the feeling of having plenty of time and not being rushed, is positively associated with a range of wellbeing measures (Kasser & Sheldon 2009). This is unsurprising, since we tend to spend free time doing things that we enjoy.
Moreover, time affluence, unlike monetary affluence, doesn’t come with diminishing marginal value. The more money one has, the less each extra dollar affects one’s wellbeing. This is not true with time. There the relationship is linear. More time = more happiness.
This is also relevant to how we make money. Those who work more than 40 hours per week report lower life satisfaction than those who work less (Brown & Kasser 2005). Indeed, reported wellbeing drops off pretty dramatically the more one works over 40 hours per week. This is because the things one can buy with the extra money are less impactful than the things one gives up by working all the time (e.g., time with friends and family, leisure activities, et cetera).
If you are going to spend on stuff for yourself…
If you are going to spend on stuff for yourself, you should aim for a larger number of smaller purchases rather than a small number of larger purchases. The reason has to do with “hedonic adaptation”, the human tendency to get used to nice things (Lyubomirsky 2010). (Think about how excited you were about your new cell phone the day it arrived. Compare that to how you feel about your phone now.) If you make one large purchase, you immediately begin adapting to it. If you make lots of smaller ones, you adapt to each as it comes in. This way you can spread out the pleasure over time.
Another strategy is to make advance purchases, rather than spontaneous ones. That is, buy things ahead of time, rather than on the spot. This allows for more anticipation pleasure (see above), and can help prevent impulsive purchases.
I want to close by reiterating that, once one’s basic biological needs are provided for, the relationship between money and happiness is very weak. Though there are better and worse ways of spending one’s money, the important things in life are not money and what it can buy you. The important things are healthy and loving relationships, fulfilling work, a sense of meaning, purpose and contribution. These should be our priorities.
For more on this theme, check out my articles on consumerism and minimalism, and this book by one of the leading researchers on the topic.
