By Paul Fenner, CFP®, CHFC
Many people think having more money and the ability to buy whatever they want will make them happier, but in reality, the way you spend your money has a greater impact on your happiness. Research even shows that once you obtain a certain income level ($75,000), your level of happiness does not change much.
You have likely heard the expression, "spend money on experiences, not things." As more research is done on the correlation between what we buy and how happy it makes us, the data points to this expression being very true.
How You Spend Your Money Matters
I see this often as my children play with their toys. Within the first 30 minutes of playing with something new, they are ready to move on to something else. When we are about ready to donate toys, at least one child suddenly takes an interest in them again. Adults aren't much different when it comes to this aspect of ownership.
There is a romance of ownership that is likely higher than actually owning the item itself. The new house, car or clothes lose their luster, sometimes within three to six months of ownership. For a new house or car, that can be a very expensive feeling.
To take this spending conversation further, imagine being a millionaire that lived around people who had many more millions than you did. How do you believe that would impact your spending patterns and habits? In absolute terms, you would be in the top 1%, but in relative terms, you may feel like you are in the bottom 1%. This could lead you into the classic “keeping up with the Joneses effect,” which can increase bad spending habits as you acquire the newest goods but become less happy in the process. (For related reading, see: Stop Keeping up With the Joneses—They're Broke.)
Methods to Optimize Your Spending
Instead of focusing on how to acquire everything you want, follow these tips to optimize your spending and increase your happiness:
- Don’t just spend your money on things or experiences, spend your money on what creates or helps support what you value most in your life. This could mean spending it on people, causes or charities, or building something you want to be in your life for a long period of time.
- Money can help you design the life you want. Setting aside time to give real thought to what you want your life to be is a critical step in determining your optimal spending habits. Having life goals, whether they are financial or not, can help you resist those spontaneous purchases that can provide a quick adrenaline rush but will likely make you unhappier in the long run.
- Fight the “keeping up with the Joneses effect” by maintaining a meaningful life and financial plan customized for what you want to achieve.
When we mismanage our money or our spending patterns go awry, we can start to feel sick and broke. How you spend your money and your physical health intersect. When you spend money in a way that serves the purposes you intend it for, you can create happiness as well as financial stability.
(For related reading, see: Ways Money Can Buy a Little Happiness.)
This article was originally published on Investopedia.