SPENDING

My review of Happy Money by Elizabeth Dunn and Michael Norton. This short book sets out five rules for how to spend money to increase our wellbeing.

One exercise I like to do with clients is to have them categorise what they spend money on into five categories. Indeed, the enforced parsimony of lockdown, when you can assess how much of your historic spending you’ve really missed, is an ideal time to do this:

1. Truly essential.
2. Core to who they are.
3. Significant positive impact on their wellbeing.
4. Negative impact on their wellbeing (e.g. guilt).
5. The rest — neither here nor there.

Category 5 is often the biggest bucket.

Why do we waste so much money? It comes back to what Daniel Gilbert calls miswanting or Daniel Kahneman calls the focussing illusion. You can read more about this in my e-book on The Life Factor, which I provide free to anyone signing up to my email list.

When we think about buying a new car, our attention is drawn to the comfortable seats, the quiet ride, the whizzy technology and perhaps the sense of gratification from having the newest or best car in the street. During our assessment of whether to buy the car, our attention is focussed on it 100%. However, once we’ve bought the car it quickly fades into the background. It spends most of the time sitting undriven and even when we’re driving it the tech doesn’t make up for the argument you’re having with your kids sitting in the back. This process of hedonic adaptation undermines much of our spending, particularly on material things.

Overcoming hedonic adaption is a core idea that underpins many of the recommendations made by Dunn and Norton. These two academics who have drawn on a range of scientific studies to come up with five recommendations for how to get more value (in terms of happiness) out of your spending.

Buy experiences

In particular, buy experiences that:

• Bring you together with other people.
• Make for a memorable story or memory.
• Are tightly linked to your sense of who you are or want to be.
• Provide a unique opportunity not easily compared with other options.

In Thinking Fast and Slow, Daniel Kahneman talks about how we view our life as a story and how memories determine how we feel about that. A short experience with a particularly positive or vivid memory can play an outsize role in our evaluation of our lives.

Experiences, much more than things, contribute to this sense of our lives as a narrative, as well as creating more positive emotions in the moment, particularly if shared with others.

Make it a treat

We live in a world where everything we want is available at the touch of a button. We can binge-watch boxsets on Netflix, order anything we want from Amazon. Order a takeaway on Deliveroo. All without troubling ourselves to get off the sofa.

Have we lost the ability to savour life? Dunn and Norton think so. The dangers of habituation mean that the enjoyment we get from something declines with repeat exposure. They recommend taking a break from things we enjoy to ‘revirginize’ (sic) ourselves. But it also means making an effort for those special occasions: nights out with your spouse, birthdays, even Valentine’s Day (OK, this is where I draw the line…).

The authors cite research undertaken on the lab-rats of social psychologists: university students. The students were told they’d be given the use of a car for a day. The cars ranged in value from $400 to $40,000. When asked to predict which they would enjoy most, they chose the most expensive. When asked after the event how much pleasure they got from having the car for a day, you guessed it: zero correlation with the value of the car. So, rather than buying a swanky car, think about hiring one from time to time and having a much cheaper car for day to day.

Buy time

Pay now consume later

This is the opposite of the modern consumer culture mantra of ‘buy now, pay later’. But brings with it a number of benefits.

First, anticipation of a future pleasure is nearly as good as (perhaps better than?) the experience itself. So deferring pleasure increases pleasure and increases the value of the experience.

Second, paying now brings forward the pain while deferring the pleasure. This has two benefits. Separating the experience from its costs enhances our focus on the pleasure by itself, rather than its consequences. But sequencing matters too. How an experience ends affects the pleasure with which we view it.

In Thinking Fast and Slow Daniel Kahneman reports on multiple experiments that show how an experience ends (‘the peak end effect’) is more important than how it was over time (‘duration neglect’). For example, someone exposed to moderate discomfort for 60 seconds followed by mild discomfort for 30, would rather repeat that experience than one of moderate discomfort for 60 seconds. The former experience, although in aggregate worse, ends better and so is preferred in memory. Paying now and consuming later takes advantage of both the peak end effect and duration neglect.

COVID has created a natural experiment in paying now and consuming later. 2020 was my and my wife’s 50th birthdays and 25th wedding anniversary. We now have a stock of postponed trips and celebrations, fully paid for, waiting for the world to open up again. The pleasure of anticipation is still there, but they now feel like they’re free.

Invest in others

The authors’ own research, carried out with Lara Aknin, finds that pro-social spending is associated with increased happiness. Indeed, on average, an increase in $100 of pro-social spending was associated with the same additional happiness as $100 in extra income.

So should we give away everything we earn? Probably not, but the authors found in a range of contexts that charitable giving supported wellbeing. In the book, Dunn and Norton suggest some tips for making charitable giving particularly beneficial for wellbeing:

• Make some kind of personal connection with the cause you are benefitting.
• Contribute to causes where you can see that there’s impact.
• Make an active choice to give.

I can add another benefit of my own here. As I’ve described elsewhere certain money types carry around guilt about their good fortune. A conscious and pro-active decision about what proportion of your income or wealth you are going to give away can free you to enjoy the rest with freedom and without guilt.

Learning from others

As I cover in my e-book The Life Factor, we’re more similar to others than we like to admit. What makes other people happy is as good a starting point as any when trying to figure out what will make us happy.

Happy Money is a useful starting point for applying this thinking to how we spend.