In the past I’ve written about spending money on the things that truly make you happy. Budgeting is one way to make sure you’re conscious of each dollar spent. Another is simply to ask yourself before any purchase whether what you’re about to buy will make you happy. But what’s the psychology behind spending? We all know that spending money gives you an instant (if short-lived) feeling of happiness. Have you ever wondered what kind of spending brings on long term happiness?
There’s been many studies on this throughout the years. I’ve put together eight strategies to make sure your spending aligns with creating the maximum happiness in your life.
Purchase Experiences Instead of Things
The studies overwhelming suggest that you’ll derive more happiness if you focus on buying experiences rather than things. It turns out that humans are remarkably good at hedonistic adaptation. In other words, if you purchase a physical item it should only take you a few weeks or months before you’ve adapted to life with the physical item.
On the other hand, you’re likely to remember experiences for years to years to come. These studies are quite common, so perhaps you’ve already heard this before. Yet, as I type these words I am reminded that I have strong fun memories of a trip to Argentina. How do I feel about the 5-year old Macbook Air that I’m typing on? I enjoyed it a lot when I bought it, but now it’s feeling a bit sluggish. Maybe you should take that Bar Trip after all.
Buy Variable Pleasures Rather Than Predictable Ones
Following along the lines of human adaptation, one way to trick the psyche is to make variable purchases that bring you happiness rather than consistent ones. It turns out that it’s not so much the intensity of people’s positive experiences that matter as much as it’s novelty, uncertainty and surprise.
For example, rather than having a massage once a month on the 1st, you might find more happiness to schedule two within a month, skip a couple of months and then start again. Or, rather than taking an annual big vacation in January, you may find it more exciting to skip the big vacation and instead take four “weekend trips” over the course of a couple of months.
Pay Now and Consume Later (Increase Anticipation)
Saving up for a big purchase has always been good financial advice. You avoid debt, interest and, you know, actually have the money to afford the purchase. Perhaps overlooked is the psychological thrill of saving up for something and anticipating the purchase.
One way to do this is to purchase things well in advance (you’ll get a good deal too). For example, booking a winter trip in summer will give you six months of anticipation leading up to the trip. If you’re like me, anticipating the trip is half the fun.
Aside from the benefit of anticipating the future consumption, you’re likely to make better consumption choices when you make a purchase in advance. In other words, nobody purchases donuts for themselves to eat in six months. By scheduling your purchases in advance you’re much less likely to make an impulse buy.
Stop Comparison Shopping
Americans are obsessed with getting a good deal and making sure they pick the right product. People can spend hours finding the right item and then making sure they get the best deal (I can be guilty of this). The research shows that all this price comparison and agonizing over our options isn’t doing much for our happiness.
You know what’s easy? Walking into a store in 1955 and purchasing jam. Do you know what’s psychologically taxing? Walking into Whole Foods in 2017 and choosing between 50 types of jam. Where possible, limit your options and you’ll find yourself more satisfied with the purchase.
Spend Money on Other People
Many people assume that spending money on themselves will make them happier than spending money on other people. The literature isn’t so clear. Turns out that spending money on other people may actually make you happier than spending on yourself, particularly if those expenses are shared experiences that involve other people.
Buy Less Insurance
The pain of financial loss is much greater than the joy of financial gain. This fact has been well established by the behavioral economists. Companies have been using this psychology against consumers for years. Because people are afraid of loss, they buy an incredible amount of insurance and extended warranties that they don’t need. We think we’re insuring against future pain but in reality we’re decreasing overall consumption and ignoring the fact that humans are great at coping with tragedy and loss (what we imagine is often much worse than the reality).
Of course this doesn’t mean skipping on the necessary insurance: health, disability and term life insurance. But it does mean thinking twice about whether you need an extended warranty on your TV or phone. Chances are good that you can safely skip it.
Follow the Crowd
If you believe in market theory, then you believe the markets are basically efficient (maybe not perfectly so, but pretty darn close). Further, you’re much more likely to find happiness in something that other people have indicated they enjoyed rather than seeking a specific item that you think is perfect for you.
If you take those two statements together, it means you should probably trust those Amazon reviews. If 500 people gave that spatula 5 stars? Buy it and move on. You need never agonize over the other spatulas you didn’t purchase.
Let’s talk about it. I hope you found these behavioral ideas interesting and maybe they will influence your future decisions. While a lot of investors spend time studying the market, portfolios, etc., I’m always surprised by the lack of understanding of behavioral psychology and how it impacts (or should impact) personal finance decisions.
Joshua Holt A practicing private equity M&A lawyer and the creator of Biglaw Investor, Josh couldn’t find a place where lawyers were talking about money, so he created it himself. He spends 10 minutes a month on Personal Capital keeping track of his money and his latest deal involved purchasing office space on the EquityMultiple real estate crowdfunding platform.