A new approach to money and happiness

Frank Magwegwe - Segment CEO: Momentum Retail.

“If money doesn’t make you happy then you probably aren’t spending it right.“

For a coffee lover like me, there is no describing the involuntary reactions that occurs when the initial hint of ground coffee beans wafts past my nose. As my nose savours smell of coffee, it triggers a reaction in my hands as I imagine clasping my hands around a cup of coffee to estimate the temperature off the brew. About eighteen months ago, I realised these reactions were the pull of addiction since I was enjoying four to six cups of coffee a day. Fearing a full blown addiction, I decided to give in to my coffee cravings only three times a day.

With only three cups a day, drinking coffee soon turned into a special treat with one cup in the morning with breakfast, another in the afternoon and the last one as soon as I get home after work. With so many meetings at the office, sometimes, I drink two cups of coffee during the day and this means no coffee when I get home. When this happens, I agonize at home for indulging during the day and now missing the added pleasure of my evening treat.

I never thought much about this until recently when I read Happy Money: The Science of Happier Spending, a fascinating book by Elizabeth Dunn and Michael Norton. It turns out that my little treat is aligned to one of the five principles of “happy money” described in the book.

Most people recognize that they need financial advice on how to earn, save, and invest their money. But when it comes to spending, most people just follow their intuitions. But scientific research by Dunn and Norton shows that those institutions are often wrong. I believe that financial advisers can add more value to their clients by advising on spending as well. For advisers interested in pursuing this, Happy Money offers a tour of new research on the science of spending that will empower them. In Happy Money, Dunn and Norton draw from a wide range of studies focusing on the relationship between money and happiness to arrive at the conclusion that having a lot of money isn’t an essential component of personal happiness, but how we spend our money can enhance our enjoyment of things that matter most to us.

In their book, Dunn and Norton put forth five principles for buying a greater degree of happiness. The book devotes a chapter to each of the five principles:

• Buy experiences (instead of things);
• Make it a treat;
• Buy time;
• Pay now, consume later; and
• Invest in others

1. Buy ‘experiences’ (instead of things)

The authors define experiential purchases as those made with the primary intention of “acquiring a life experience: an event or series of events that one lives through.” In contrast to material purchases that are made principally to “acquire a material good: a tangible object that is kept in one’s possession,” experiences such as holidays can be revisited in our memories, recreating happiness each time we recall them.

2. Make it a treat

In my introduction, I mentioned that I made drinking coffee a treat. The authors refer to a growing body of research that suggesting that altering consumption patterns can provide a route to getting more happiness for less money. A simple illustration of this from the book is that the enjoyment of a $5 speciality coffee tends to be greater if you have it once a week instead of everyday.

3. Buy time

Despite the common adage that time is money; the default driver in most financial decisions is the best price, sometimes at the expense of free time. An example of putting a value on free time is paying someone to clean your house to give you the time to do the things you really enjoy, despite the additional expense. A key spending question that comes from this principle is: How will this purchase change the way I use my time?

4. Pay now, consume later

The ubiquitous credit card encourages a “consume now and pay later” behaviour. The authors argue that by paying upfront and delaying consumption, “you can buy more happiness, even as you spend less money.” Usually, a period of positive anticipation is created by delaying consumption hence; we often say “I am looking forward to the holiday” after booking a holiday months in advance.

5. Invest in others

The authors’ research shows that across all income levels, people who devoted more money to donations and gifts for others, called ‘prosocial spending’ reported themselves as happier. This is contrasted against those who spend on monthly expenses and gifts to themselves, called ‘personal spending.’ This may explain the growing trend of many wealthy people, donating large portions of their wealth to philanthropic causes.

Dunn and Norton’s spending principles articulate a great framework for financial planners to use in helping their clients develop a general awareness of how to be happier spending their money. This spending framework ensures that financial decisions irrespective of income, become ‘and’ discussions instead of only ‘or.’ For example, a client makes appropriate contributions to retirement savings and makes spending priorities that provide “experiences” that gives her great satisfaction before retirement.

Every financial planner can benefit from reading Happy Money and implementing some of the ideas that will help clients answer this question: Is their primary goal to accumulate as much money as possible for retirement, or to maximize the enjoyment from the money? Such considerations will balance the financial planning process since spending will get as much attention as accumulation. Looking ahead, I believe not in the distant future many financial plans will include strategies for “happy spending.”