Dr. GoodCents: Spending Money to Buy Happiness – What Works?

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shutterstock_120743938A clinical psychologist with nearly 30 years of experience, Dr. Shapiro is ready to answer questions, offer advice and share strategies to help you alleviate the mental stresses of money management. Send your question to GoodCentsDr@gmail.com and it may be answered in an upcoming column!

We need to take a balanced approach to the long-term goal of achieving financial fitness, with the right combination of living for today and saving for tomorrow. The psychology of smart money management involves more than subjecting ourselves to an endless barrage of Suze Orman DENIED!s whenever we contemplate a purchase. Instead, we need to learn how to translate money into happiness in the most efficient possible way.

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The question of how a given amount of money can produce the most enjoyment has had psychologists scratching their heads and experimenting for years. Their studies have generated some surprising discoveries that you can use to get the most bang for your bucks.

Buy experiences, not stuff.

Shiny objects catch our eye and make a promise: If you owned me, you’d be happier. Of course there is some truth to this—but not much. Most of the kick comes at the moment of purchase and in the hours and days immediately following, and the kick generally diminishes after that.

Ownership, per se, isn’t much of an experience. We get used to our possessions pretty quickly, and it isn’t long before the thrill is gone. The reason is that there aren’t many moments of our days when we’re consciously thinking, “I’m so happy to be wearing this sweater,” or, “I love driving this car;” we just get dressed and go to work.

Experiences don’t usually last long, and yet they make better purchases for most people. The benefits of good times last longer than the experiences themselves. These benefits include happy memories and, if the experiences are shared with other people, enhanced relationships with good material for conversation. Memorable experiences add to the stories of our lives in ways that material possessions do not. Dollar for dollar, most people are better off spending money on vacations, concerts and amusement parks than on clothes, jewelry and furniture.

Make a lot of small purchases, not a few big ones.

Research shows that a given amount of money produces more pleasure when it is spent on a large number of small purchases rather than a small number of big buys. When we acquire a product or service we like, there is a spark of pleasure, but the size of that spark is not closely related to how expensive the purchase was. It’s a matter of diminishing returns: $100 buys do not usually bring us twice us as much happiness as $50 buys, let alone 10 times as much enjoyment as $10 purchases.

However, the frequency of treats does have an impact on people’s quality of life, because each one provides a little pick-me-up. If you do the psychological math, this means that spreading ten $10 purchases over a period of time will produce more enjoyment that spending $100 on one big thing. It’s like 10 x 10 ≠ 100. So rather than tacking more options onto your car, why not put that money into a recreation fund that can be used to add fun to your life on a number of occasions?

Variety is the spice of life.

The most enjoyable experiences usually involve some kind of novelty or variety. When pleasures are repeated over and over, they become routine. Money spent on habits is much less effective than money spent on treats. And if the same treat is repeated over and over, it soon becomes a habit. Taking the money you spend on a habit and breaking it into small pieces that you then spend on treats will increase the psychological value of that money.

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If you get a latte every morning or a restaurant meal every day for lunch, you’ll run through thousands of dollars a year without ever feeling like you’re doing something special for yourself. If you establish a thrifty baseline like bringing brewed coffee and a packed lunch from home, you’ll be able to jazz up your routine with pleasant surprises that you can easily afford. The money that’s left over can be saved or used to enhance your life in other ways.

Smart Spending

Nutritionists agree that starvation diets are not the way to lose weight; they might work in the short term, but they backfire in the long run. The way to lose weight is to eat moderate amounts of healthy food. The more you enjoy your eating, the more able you’ll be to sustain a healthy diet over time.
It’s the same principle with money. Trying to eliminate all discretionary spending is not the answer because no one can sustain a lifestyle based on constant deprivation. Also, the long-term solution to personal finance problems is to learn new and more effective ways of managing money, happiness and life. Stay tuned to Dr. GoodCents for more tips on doing exactly that.