How to Spend Money on Happiness

Giving money to people you love probably makes you happy. Spending money on others also probably makes you happier than spending it on yourself, just as spending money on experiences makes you happier than spending money on things. So does that mean you should max out your credit card to take your entire family on a cruise? Not exactly.

Conventional wisdom holds that some kinds of spending are linked to happiness. Andrew Blackman recently cited some actual substantiating research in his excellent Wall Street Journal article, “Can Money Buy You Happiness?

Before you pull out the plastic and start shopping, though, keep one important point in mind: Spending to create happiness must come from your discretionary money.

This is cash that’s available to spend after you pay all such fixed expenses as rent, loan payments, utilities, retirement contributions, building emergency reserves, insurance premiums and the like. Discretionary spending can include luxuries or extras like eating out, vacations, gifts, entertainment and gadgets. It also can include items that may be necessities or fixed expenses, such as housing, vehicles, clothing, and food.

For example, a car is a necessity for most people in South Dakota, where I live. A well-maintained 10-year-old Toyota Avalon with 90,000 miles can transport you just as effectively as a new model. The older car costs around $10,000; the new one costs around $35,000. The $25,000 difference is discretionary spending.

If you want more discretionary money for happiness spending on such things as giving or experiences, you might spend more frugally on necessities. The other option – borrowing – generally doesn’t work. Research confirms that borrowing and debt create an unhappiness that pretty much cancels out any happiness from spending.

A smiley is fixed to a 'no entry'- sign in Dresden, eastern Germany, on January 16, 2012. (Photo by Arno Burgi/AFP/Getty Images)

Photo by Arno Burgi/AFP/Getty Images

As Elizabeth Dunn, associate professor of psychology at the University of British Columbia and co-author of Happy Money, says in the Journal article: “Savings are good for happiness; debt is bad for happiness. But debt is more potently bad than savings are good.” Dunn found that spending on others usually produces the greatest happiness and that the perceived effect of the gift, not the dollar amount spent, matters.

Even though we tend to view tangibles as offering more value, the memories and learning we gain from experiences also actually provide more happiness. Creating experiences can involve buying actual stuff: baseball equipment with the intention of playing with your children, for example, or a camper to hit the woods with your family. Of course, buying stuff for creating experiences only creates happiness if you use it and the mitts don’t gather dust in your basement or the abandoned camper rust in your backyard.

After reading research on the value of spending on giving and experiences, I came up with possibly the ultimate happiness-spending scenario: Give an experience that includes both the recipient and the giver. Maybe, if you can afford it out of discretionary money, taking the family on that cruise isn’t a bad idea after all.

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Rick Kahler, MSFP, ChFC, CFP, is a fee-only planner and author. He is president of Kahler Financial Group in Rapid City, S.D. Find more information at KahlerFinancial.com. Contact him at Rick@KahlerFinancial.com, or 605-343-1400, ext. 111.

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