Money

How to Buy Happiness

It's all about making the right spending decisions

When it comes to money, we tend to think that the more we earn, the happier we’ll be.

Yes, life satisfaction does increase with an uptick in income—but only up to a point. In fact, research shows that once Americans earn beyond $75,000 a year, additional income doesn’t make them any happier.

So how can money buy us everyday happiness? In their new book, “Happy Money: The Science of Smarter Spending,” behavioral scientists Dr. Elizabeth Dunn and Dr. Michael Norton stress that the secret is not how much money you have—it’s how you use it.

So we spoke to Dr. Norton, a professor at Harvard Business School, to find out what little tricks we can do—like splurging on a nice dinner out with friends, instead of shelling out for a high-def TV—to score the most happiness bang for our buck.

LearnVest: The common belief is that having more “stuff” makes us happier, but you say it isn’t true. How do we get past this?

Dr. Norton: It’s a great question because it’s very hard for us to get away from the idea that stuff is a good way to make us happy. We want to know if we are making progress in our lives or doing better than others—both of these things are deeply human tendencies. I can say, ‘I have a bigger house than I used to, so I must be doing better in my life.’

The problem—as research shows—is that these things [like having a larger home] don’t actually make us happier. We like things that we can count, such as square feet and income, but we need to stop counting and really focus on things that you can doto make yourself happier instead.

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So what’s the biggest takeaway from your research?

The first principle that we discovered is what we call “buy experiences.” If you ask people how they spend their money, it’s very often on stuff that tends not to make us any happier. So if stuff isn’t changing our lives, what is? The answer: buying experiences, which can lead to more happiness, on average.

We look forward to experiences more than we look forward to stuff. So pining for a vacation for a month is great because it generates anticipation and excitement. Plus, vacations are more interesting than watching TV—the experience itself is better. And, after we have experiences, we have great memories. That’s another source of happiness: We don’t usually look back on buying a TV in the same way as an interesting trip!

What kind of experience should we buy more often to increase our happiness?

The easiest one is to go out for a nice dinner with someone who you care about. Of course, people often say, “I don’t have the money for a special dinner.” But they’ll go to Starbucks and spend $5 each day. Well, there’s $25 to put toward dinner.

We’ve also done a lot of research on investing in others—how spending on other people can make you happier. So if you can treat someone to an experience, and also have the experience yourself, you are likely doubling your happiness.

How can we boost satisfaction with each buy?

One of the things that we talk about in the book is the “make it a treat” principle: The idea here is that the things you love the most are exactly the ones you should give up. So if you love buying a coffee every day, take a break from it for a week … and you’ll actually be much happier. So we’re not telling people to give up things entirely—research shows that you’ll be happier with just a temporary break.

RELATED: The Science of Spending: What Really Makes Us Happy?

Your research also shows that paying up front makes up happier. How so?

Usually, it’s for financial reasons that we pay more now instead of later—you don’t want to go into debt, and then not be able to pay it off. But, it turns out, paying now is also a great source of happiness. And we’re also happier the more in advance we pay. It can be kind of painful to fork over the cash a month in advance for something, but then it can feel like it’s free by the time you get it. And that can be really exciting.

Dr. Dunn, the co-author of my book, took a related approach to her destination wedding in Mexico, encouraging her guests to spend several days at an all-inclusive resort. Because the guests paid for their stay months in advance, they could enjoy meals, drinks and activities without ever reaching for their wallets. Of course, the drinks weren’t free, but because the all-inclusive trip had been paid for months earlier, they tasted free.

How can someone make charitable giving a happy experience?

With charitable giving, we try to encourage people to figure out ways that they can feel like they are having a specific impact. If you are an accounting firm, you don’t send your employees to build a house. Rather, you have them help low-income people with their taxes. It’s the same amount of time volunteering, but you’re going to feel so much more effective helping.

We’ve seen this in our research. For example, if it’s a charity that has a very targeted purpose—like “for every X dollar you give, we will do this specific thing to help this specific person”—it makes us happier when we give to these places because we feel like we are having a direct impact. When we donate to big, nebulous organizations, we are still happy—but we don’t have the same great feeling of having a specific impact.

RELATED: Confessions of an Over Saver: Why I Hate Spending Money

Is it possible to increase happiness while saving?

Saving is really hard because, for the most part, it’s not fun. In general, the money comes out of a paycheck—and goes straight into some account. And that’s really, really boring. We may know that the saving is going to make us happy later, but we’re really not good at “later.”

So we’re actually doing research now to make saving more fun. We already do this with kids: The piggy bank is a product that makes no sense, but how else do we teach kids how to save? You can tell them, “You can use it for retirement,” but they’re not going to care or understand. Or you can say, “The pig is hungry.” When you put money in, the pig smiles. So we are trying to think of similar ways for grownups to make saving not just rational but fun.

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