Recently I read a book called ‘Happy Money’. The authors of this book happen to be 2 college professors from America (Elizabeth Dunn and Michael Norton), they started full time work around the same time and both had the same question; what should I spend my money on? As the title suggests, this book was all about their research into the best way to spend your money in order to maximise happiness, or in other words, get the best ‘bang for your buck’.
As financial advisers, we spend a lot of time working with our clients to come up with strategies that allow them to maximise the income they have available to spend both now, and into retirement. But the part of the equation that sometimes gets missed, is how can we spend this money in a way that will make us the happiest?
The book is split into 5 main chapters, which makes it very simple to give an overview of. See below the 5 strategies the authors recommended and my brief explanation and thoughts on each.
1. Buy Experiences
Think about the last family holiday you went on. I bet that you enjoyed it at the time, but also that over the years since then, you’ve actually continued to get enjoyment out of this every time you discussed it again and reminisced about what happened. Compare this to buying the latest iPhone or iPad, or a brand new car. At the time of purchase, you might have felt a ‘sugar hit’, but in a years time the newest model iPhone would have come out, and over time your new and exciting purchase is just something that you use to call people.
2. Making It A Treat
Everyone has a type of food that they love, that isn’t that great for them. Imagine if you ate that food every single day. Other than the health issues, you would find that pretty quickly your enjoyment of this type of food would go down dramatically. Now imagine that you save that food for a special occasion, and savour every bite. The same applies with spending money.
3. Buy Time
This can be approached in 2 different ways. The one that occurs to most people, is to take some of the money they earn each week to pay someone to do the things they don’t want to do e.g. cleaning, ironing. Although this makes sense in a lot of cases, another important way to look at this strategy is to ‘buy time’ by not purchasing things we don’t need. For example, let’s assume 2 people who earn approximately $1,000 for a 5 day work week purchase a car. The first person takes out a loan to purchase a brand new car with repayments of $400 per week. The second person purchases a car for half the price, and their repayments are $200 per week. In effect, the second person has now ‘freed up’ one day per week, and can either use this time to help out with their family or kids, or just have a long weekend every week.
4. Pay Now and Consume Later
This is one that goes against the grain of every second advertisement we see on TV. Compare 2 new school leavers who want to go on a trip overseas. The first one puts it all on a credit card, has a great time, and comes back and has to pay off the balance of the credit card, as well as the interest that accrues. By the time they have paid this off, the fun times they had have been overshadowed by the pain of having to come up with the money for their credit card repayments every month. The second one saves the money they need before booking the trip. Although they have had to wait a bit longer, they get to come home from their trip completely debt free, and can focus on using their spare cash flow on whatever they want to spend it on, not on interest repayments.
5. Investing In Others
Counter-intuitively, the act of giving away money makes people feel wealthier (to an extent). Many studies have demonstrated that spending money on others can increase your happiness even more, per dollar, than spending it on yourself. Think about the last time you gave to a charity or cause you believe in, and how long that feeling lasted, or even just the last time you took someone you care about to dinner. In most cases, the enjoyment from this lasts longer than if you spent a comparable amount on yourself.
It’s important to note that to get something out of these ideas, you don’t need to give away all material possessions and move to Nimbin. And of course, like everything in life, these concepts aren’t one size fits all. You may find that one or more of these categories doesn’t suit your personality type, and that you don’t really get any enjoyment, out of following that particular guideline. But like everything, it makes sense to take a step back occasionally to look at this, and the next time you go to spend, think to yourself ‘Is this purchase making my life better’, or as the authors of this book would say; ‘Is this happy money’?
Written by Dallas Davison.
Dallas Davison, Michael Hogue and Ali Hogue.