Are You Spending Money the Right Way?

It isn’t how much you earn that makes you rich, it’s how much you keep — your net worth. And it isn’t how much you are worth that makes you happy; it’s what you spend it on.

Charles Dickens’s fabled Ebenezer Scrooge embodied this truth. He was very wealthy, no doubt in part because of his frugality. He didn’t spend money socializing, going to plays, or entertaining. He ate the diet of the poorest in society, lived in a cold and drafty house, and barely had enough light to see by. If Scrooge lived today, he would most certainly eat stale cereal and generic macaroni and cheese, keep the thermostat at 64, and only buy 40-watt light bulbs.

Scrooge was not a happy man. Dickens described him as “hard and sharp as flint,” someone who “carried his own low temperature always about with him.” While he understood how to save, saving money didn’t make him very happy. And if we can believe modern research, we might conclude one of the reasons he was so miserable is because he didn’t have a clue how to spend.

Before all you spenders start rejoicing, let me be clear. Spending in itself does not beget happiness. Spending money in a wrong manner can bring much unhappiness and suffering into one’s life. Research shows money does buy happiness, but only if you spend it on the right things.

Spending money on a healthy diet, adequate shelter, clean clothing, good medical care and reliable transportation is sure to increase happiness. Giving gifts or charitable donations can create happiness. Spending money on experiences rather than material things – a family vacation, say, rather than a new bedroom set – increases happiness.

Some new research found something else to add to the list of how to spend money right. According to PsyBlog.com, researchers at the Universities of Manchester and Warwick found that therapy was 32 times as cost effective as money in making people happier.

The researchers compared people who spent money on psychotherapy to those who had experienced large increases in income. They found that the increase in happiness for someone who spent $1,300 on therapy was equivalent to the increase in happiness for someone whose income grew by $42,000 a year. The researchers concluded that the importance of money in improving our well-being and giving us greater happiness is vastly over-valued.

While this is great news for therapists, who incidentally are among the lowest-paid professionals, don’t expect to see long queues in front of their offices anytime soon. While most people tell you they don’t think money makes one happy, most don’t really believe it. If you need proof, just ask the next 10 people you meet which they would choose: spending $1,300 for therapy or getting a $21,000 raise (the equivalent of half the happiness value of the therapy).

If spending money on standard psychotherapy is 32 times as cost-effective as money, is the impact of financial therapy significantly more? The field is new, so for now we just don’t know.

Too bad we can’t all be like Scrooge, who, true to his frugal nature, had the best of both worlds. The therapeutic intervention of Marley and the Ghosts of Christmas Past, Present and Future transformed Scrooge into a very happy man. And it didn’t cost him a cent.

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Written by Rick Kahler, CFP, president of Kahler Financial Group in Rapid City, S.D.

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