Money can buy happiness - if you spend it on these three things

Number one on the happy person's shopping list? Experiences, such as travel.
CHARLES PLATIAU/REUTERS

Number one on the happy person's shopping list? Experiences, such as travel.

Whoever says money can't buy happiness doesn't know how to spend it.

That's the view of Michael Norton, a professor at Harvard Business School and co-author of Happy Money.

He recently gave a talk at Amplify, AMP's annual ideas and innovation event. He asked the audience what people would do if they found $20 to spend it in a way that would make them the happiest.

A flash car is unlikely to make you a jollier person in the long run, but giving a flash car to somebody else might.

A flash car is unlikely to make you a jollier person in the long run, but giving a flash car to somebody else might.

Suggestions from the audience included treats such as chocolate cake or flowers or giving it away to a homeless person or a busker.

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Professor Michael Norton, co-author of Happy Money: "If you think money can't buy happiness, it just means you're not ...

Professor Michael Norton, co-author of Happy Money: "If you think money can't buy happiness, it just means you're not spending it right."

He then asked the audience to think of the last $20 they spent and what they actually spent it on – and to raise their hands if the answers to both questions were the same.

Most hands stayed firmly in laps, backing up Norton's point. Obviously we have to take care of basic needs, but his argument is that most of us spend too much time on the second question and not enough on the first.

"Every world religion and every self-help book says money can't buy happiness," Norton says. "It's kinda right, and kinda wrong. The typical ways we spend our money don't pay off in much happiness, but there are other ways to use our money that do pay off. If you think money can't buy happiness, it just means you're not spending it right."

Many people who win the lottery wind up miserable, even if they were relatively happy beforehand.
123RF

Many people who win the lottery wind up miserable, even if they were relatively happy beforehand.

Many people who win the lottery wind up miserable, even if they were relatively happy beforehand. 

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This is partly because it's a life-changing event and change is unsettling. In the United States, it's compounded by the fact that in order to redeem a lottery ticket, you have to agree to be in the media so everyone knows you have the money and, sadly, many see you as a meal ticket.

That's not the case in New Zealand and the expert advice here is not to tell people and not to rush into any decisions.

But the reason lottery wins don't translate to happiness is also because of how most winners spend their money.

"The number one thing people do with lottery money is they buy stuff and it's for themselves, such as a new house, new boat, new car," Norton says. "It's not that it makes you unhappy but it … has no effect on your happiness, not bad, not good, just nothingness."

So what's the alternative? Norton suggests three ideas with a better happiness pay-off.

First, buying experiences for yourself.

Norton says experiences are better before they happen, while they happen, and after they happen.

Consider spending $2000 on a fancy television versus $2000 on a holiday.

While you're waiting for the TV to arrive, you feel frustrated and impatient. While you're waiting for the holiday, you feel anticipation and excitement.

You fantasise about both the trip and the TV. You might tell yourself you'll invite friends over or have family movie nights, but what really happens when you buy a TV is that you get a box, put it on a wall, and sit by yourself for hours.

During the holiday, things are not quite as good as the fantasy. But you're still out of the house experiencing things with other people, which beats the reality of buying a TV.

The experience wins after the fact too. The TV becomes obsolete and your neighbour buys a better model. But even if your neighbour and you both take a trip to Paris, it's impossible to compare the two experiences so both people get to think their trip was better.

One study asked people about their honeymoons. The week before they were very excited, during the honeymoon things were OK but not perfect, the week after it was good. Fast-forward 20 years and suddenly the honeymoon was "amazing". Our minds are built to forget negative experiences.

Experiences also inform who you are and let you tell stories about yourself. "Let me tell you about the first time I went to Paris versus let me tell you about the first TV I bought," Norton says.

Second, Norton suggests spending money to buy time.

His example is about how a bigger house makes you less happy if the trade-off is that you have to spend a long time commuting each day. Even buying a fancy car doesn't fix that.

But here are other ways to buy time. I've writtelamborghn before about the value of outsourcing household chores and life administration to help achieve work-life balance.

Third, spending money on others is a guaranteed way to boost happiness. Norton says this seems to be universally true, with an experiment repeated in Canada and Uganda yielding the same results.

People were given either $5 or $20, or the amount in Ugandan currency with the equivalent purchasing power. The money came with a note that either said "by 5pm today, spend this money on yourself", or "by 5pm today, spend this money on someone else".

The Canadian undergraduates who spent it on other people bought items such as a stuffed animal for a niece or a scarf for their mother's birthday, gave it to homeless people, or bought someone a coffee.

The Ugandans generally gave more meaningful gifts such as giving medicine to a friend whose son was sick with malaria, because that was the need that presented in their environment.

At the end of the day, those who spent money on others were happier than those who spent it on themselves, regardless of whether it was $5 or $20.

You might think saving someone's life had a bigger happiness pay-off than buying someone a scarf they didn't really need, and you'd be right. But the difference was not huge – the key thing was spending the money on someone else.

What will you spend your next $20 on?

 - Sydney Morning Herald

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