Despite popular assertions to the contrary, science tells us that money can buy happiness. To a point. From a recent study (my emphasis):

We report an analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1,000 US residents conducted by the Gallup Organization. ... When plotted against log income, life evaluation rises steadily. Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ~$75,000. For reference, the federal poverty level for a family of four is currently $23,050. Once you reach a little over 3 times the poverty level in income, you’ve achieved peak happiness, as least far as money alone can reasonably get you.

This is something I’ve seen echoed in a number of studies. Once you have “enough” money to satisfy the basic items at the foot of the Maslow’s Hierarchy of Needs pyramid — that is, you no longer have to worry about food, shelter, security, and perhaps having a bit of extra discretionary money for the unknown — stacking even more money up doesn’t do much, if anything, to help you scale the top of the pyramid.

But even if you’re fortunate enough to have a good income, how you spend your money has a strong influence on how happy — or unhappy — it will make you. And, again, there’s science behind this. The relevant research is summarized in a recent study in the Journal of Consumer Psychology by a quartet of Harvard researchers: “If money doesn’t make you happy, then you probably aren’t spending it right.” (July 2011, available online at www.ScienceDirect.com )

Most people don’t know the basic scientific facts about happiness — about what brings it and what sustains it — and so they don’t know how to use their money to get it. It is not surprising when wealthy people who know nothing about wine end up with cellars that aren’t much better stocked than their neighbors’, and it shouldn’t be surprising when wealthy people who know nothing about happiness end up with lives that aren’t that much happier than anyone else’s. Money is a chance for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don’t.

What is, then, the science of happiness? I’ll summarize the basic seven points as best I can, but checking out the paper itself will add to it, with citations, etc.

1. Buy experiences instead of things
Things get old. Things become ordinary. But experiences are totally unique; they shine like diamonds in your memory, often more brightly every year, and they can be shared forever. Whenever possible, spend money on experiences such as taking your family to Disney World, rather than things like a new television.

2. Help others instead of yourself
Anything we can do with money to create deeper connections with others tends to tighten our social connections and reinforce positive feelings about ourselves and others. Imagine ways you can spend some part of your money to help others — even in a very small way — and integrate that into your regular spending habits.

3. Buy many small pleasures instead of a few big ones
Because we adapt so readily to change, the most effective use of your money is to bring frequent change. Break up large purchases, when possible, into smaller ones over time so that you can savor the entire experience. When it comes to happiness, frequency is more important than intensity. Embrace the idea that lots of small, pleasurable purchases are actually more effective than a single giant one.

4. Buy less insurance
Humans adapt readily to both positive and negative change. Extended warranties and insurance prey on your impulse for loss aversion, but because we are so adaptable, people experience far less regret than they anticipate when their purchases don’t work out.

Furthermore, having the easy “out” of insurance or a generous return policy can paradoxically lead to even more angst and unhappiness because people deprived themselves of the emotional benefit of full commitment. Thus, avoid buying insurance, and don’t seek out generous return policies.

5. Pay now and consume later
Immediate gratification can lead you to make purchases you can’t afford, or may not even truly want. Impulse buying also deprives you of the distance necessary to make reasoned decisions. It eliminates any sense of anticipation, which is a strong source of happiness. For maximum happiness, savor (maybe even prolong!) the uncertainty of deciding whether to buy, what to buy, and the time waiting for the object of your desire to arrive.

6. Think about what you’re not thinking about
We tend to gloss over details when considering future purchases, but research shows that our happiness (or unhappiness) largely lies in exactly those tiny details we aren’t thinking about. Before making a major purchase, consider the mechanics and logistics of owning this thing, and where your actual time will be spent once you own it. Try to imagine a typical day in your life, in some detail, hour by hour: how will it be affected by this purchase?

7. Beware of comparison shopping
Comparison shopping focuses us on attributes of products that arbitrarily distinguish one product from another, but have nothing to do with how much we’ll enjoy the purchase. They emphasize things we care about while shopping, but not necessarily what we’ll care about when actually using what we just bought. In other words, getting a great deal on cheap chocolate for $2 may not matter if it’s not fun to eat.

Happiness is a lot harder to come by than money. So when you do spend money, keep these lessons in mind to maximize what happiness it can buy for you. And remember: it’s science!

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia

As Americans try to spend less and go on a budget this provides an opportunity to teach the next generation financial principles they may never have seen in the prosperous years they have been alive. Here are my ten principles, which I often communicate in person, for teaching children about money:

1. Talk about money. Every time money is involved, parents have a chance to teach their children the values and analysis behind their actions. Money should never be the primary topic of discussion, but it is one of the most important topics through which we communicate our wisdom and values to our children. Every purchase, investment, or donation can be a time to teach your children something about your values.

2. Talk openly about money. Parents make a mistake when they keep information from their children. The only way children learn what is a good deal and what is too expensive is by the experience of what their family earns and what items cost. Hiding this information robs children of the financial education they need.

3. Talk factually about money. Many parents have strong emotions about money, based on their childhood experiences. These emotions are always transmitted to children. Instead of helping children, they can cripple children from growing to make sound financial decisions.

4. Require chores; pay for optional work. Everyone in the family has to help complete the work that needs to be done. If you want to pay your children, only pay them for optional work they can choose to do or not to do.

5. Provide children an allowance they can make real choices with. Talk about money is important, but children need real-world lab experience to understand the consequences of their decisions. Consider giving them an allowance large enough so that they can purchase some of their own needs. Then continue to give them honest advice, and help them ask the right questions to make wise decisions based on their values.

6. Help children prioritize purchases. Ask them if this purchase is better than other purchases they are considering making.

7. Help children comparison shop. Help them consider issues such as cost, quality, and convenience.

8. Require children to wait before making large purchases. Adults should wait at least a month whenever they are making a large purchase. Children shouldn’t be expected to wait that long. Here is a good rule of thumb: Children should be required to wait as many days as they are old in years before being allowed to make a large purchase (over a week’s allowance). There is always tomorrow…and over half the time they won’t remember what attracted them to it in the first place. Developing this habit will help make them resistant to impulse buying.

9. Don’t use money as a punishment. Your priority should be helping to give your values to your children, not buy their outward behavior.

10. Don’t loan your children money! If their desired purchase is something they should be saving for, let them save for it. If you want to buy it for them for the value of the experience, buy it for them. The principles are, “If they want it, they have to save for it. If you want them to have it, you will buy it for them.” Loaning your children money for items they want teaches them they aren’t responsible and they don’t have to prioritize.

Some may disagree with all of these admonitions–I don’t intend to become a “parenting guru” in my spare time–but I do hope that, at minimum, this will help you be thinking about how your wishes get passed down.

Financial Advisor Richmond
Financial Planner Richmond
Financial Planners Virginia