How Should I Spend My Money?

NYC offers so many tempting ways to spend money: apartments, jewelry, clothing, etc, which we often believe will make us happy.  Yet, most research concludes that spending money on experiences, saving time (especially to minimize commuting), giving to others and purchasing smaller, frequent treats (expensive chocolate bars over one large sailboat) produce the greatest “happiness” return.

One of my business school professors, Prof Malcolm Baker, espoused these concepts in his “last lecture” of the year.  In Professor Baker’s view, financial analysis enables us to:

  • Deliver a logical, organized thought process that stimulates thinking.
  • Deliver useful, though rough, estimates.
  • Recognize the limitations of numerical analyses and risk management and measurement.
  • Create value as an integral part of firm strategy and operations.

Ultimately, he said, “Finance is ideally more of a process, a lens to view the impact of your decisions.”  I try to apply this theory of finance not only to how my company spends money for financial return, but also to how I spend my own money for “happiness” returns.  I follow the research below to help me perform this analysis:

Opt for an experience rather than something tangible.  Research shows that individuals are happier when they invest in experiences rather than material possessions.  “Do experiences make people happier than material possessions?  In two surveys, respondents from various demographic groups indicated that experiential purchases—those made with the primary intention of acquiring a life experience—made them happier than material purchases.”  (Van Boven & Gilovich, Journal of Personality and Social Psychology, 2003).

Invest in your happiness with more free time.  Research shows that spending money on time-saving purchases — e.g., a shorter commute, lawn-mowing, laundry, housecleaning — promotes greater happiness than spending money on objects.  “Surveys of large, diverse samples from four countries reveal that spending money on time-saving services is linked to greater life satisfaction.”  (Whillans AV, Dunn EW, Smeets P, Bekkers R, & Norton M, National Academy of Sciences, 2017).

Indulge yourself.  Indulgences may seem impractical in the moment, but the more time that passes after a purchase decision, the more consumers regret choosing a practical option instead of an indulgence.  (Kivetz & Keinan, Journal of Consumer Research, 2006).

Giving might actually be better than receiving.  Teams that received pro-social bonuses performed better after receiving the bonuses than teams that received money to spend on themselves. People are generally happier and more satisfied when they give to others, so be generous (Anik L, Aknin LB, Norton MI, Dunn EW, & Quoidbach J, PLoS ONE 8(9): e75509, 2013).

When you get your next bonus or pay check, try out one out and see how you feel.


How Should I Spend My Money?

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