One of the premises of my book is that wealth goes far beyond the financial realm. A future blog post will discuss this in more detail. With the new year approaching this, is the time of year when many people make resolutions for the year ahead. I thought I would illuminate some very interesting research about money and happiness that may help influence readers in terms of what to focus on when it comes to their resolutions. Awhile back there was an interesting article in the Wall Street Journal entitled Can Money Buy you Happiness? I am going to highlight what I found to be the most important takeaways from the article. I found it to be quite interesting and thought provoking and I hope it has the same effect on you.
The key findings are as follows:
- After a certain level of income, it’s more important how one spends their money than making more money.
- Experiences have a much higher return on investment than material goods.
- To enjoy material goods more than one should:
- Foster gratitude and appreciation
- Bring novelty to them
- Stay out of debt
Experiences vs Material Goods – Can Money Buy Happiness?
According to the article, giving money away makes people a lot happier than spending it on themselves. And when they do spend money on themselves, people are a lot happier when they use it for experiences like travel than for material goods. Part of the reason is that people underestimate the value of experiences because we don’t have as many tangible and lasting things to show from them compared to buying material goods. We tend to think that buying goods is a better return on investment than experiences. It turns out we are quite wrong. Professor Howell from San Francisco State University says in the article:
“What we find is that there’s this huge miss forecast,” he says. “People think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.” And yet we still keep on buying material things, he says, because they’re tangible and we think we can keep on using them.
The following table shows how people misjudge their expected level of satisfaction prior to purchasing a material good and investing in an experience versus how they actually rate them after some time has passed. It’s not that material goods don’t bring them a higher level of satisfaction. They do, as the table shows. Rather, the expectation for experiences is so low that we are really surprised by how satisfying they end up being and that halo effect continues to stay with us after the experience has been completed such that the absolute level of satisfaction exceeds that of material purchases.
So why do experiences end up being more satisfying than material goods? Here is what the article says which I think is spot on:
The new dress or the fancy car provides a brief thrill, but we soon come to take it for granted.
Experiences, on the other hand, tend to meet more of our underlying psychological needs, says Prof. Gilovich. They’re often shared with other people, giving us a greater sense of connection, and they form a bigger part of our sense of identity. If you’ve climbed in the Himalayas, that’s something you’ll always remember and talk about, long after all your favorite gadgets have gone to the landfill.
And, crucially, we tend not to compare our experiences with other people so much. “Keeping up with the Joneses is much more prominent for material things than for experiential things,” he says. “Imagine you’ve just bought a new computer that you really like, and I show up and say I’ve paid the same amount for one with a brighter monitor and faster processor. How much would that bug you?”
In a recent paper called “Waiting for Merlot,” Prof. Gilovich and colleagues showed that we also get more pleasure out of anticipating experiences than anticipating the acquisition of material things. People waiting for an event were generally excited, whereas waiting for material things “seemed to have an inpatient quality.”
How do we get more satisfaction out of our material purchases? Fostering gratitude and appreciation helps quite a bit. Taking things for granted obviously numbs ourselves to the value they bring to our lives By making a concerted effort to “count our blessings” when it comes to what we have, we can gain more satisfaction from our material goods. In addition,
Increasing variety, novelty or surprise can also help you to enjoy your possessions more. “When things become unchanging, that’s when you adapt to them,” Prof. Lyubomirsky says.
Research has also found that people who spent money on other people were happier than spending it on themselves. Even more important,
What moves the needle in terms of happiness is not so much the dollar amount you give, Prof. Dunn says, but the perceived impact of your donation. If you can see your money making a difference in other people’s lives, it will make you happy even if the amount you gave was quite small.
And as someone who earns a living in real estate where it is critically important to make sound location choices to improve the odds of investment success, the following was very important to me:
“Use money to buy yourself better time,” says Prof. Dunn. “Don’t buy a slightly fancier car so that you have heated seats during your two-hour commute. Buy a place close to work, so that you can use that final hour of daylight to kick a ball around in the park with your kids.”
Finally, build up savings first and avoid debt if possible.
“Savings are good for happiness; debt is bad for happiness. But debt is more potently bad than savings are good,” Prof. Dunn says. “From a happiness perspective, it’s more important to get rid of debt than to build savings.”
Over to You
After reviewing the research are you rethinking your financial New Year’s resolution? Will you choose possessions or experiences? I’d like to hear your thoughts.
Whichever you choose I’d like to wish you a Happy New Year and I hope you have a prosperous and healthy 2015!