Why Money Really Can Buy Happiness

US News

They say money can't buy happiness, but Laura Vanderkam, author of All the Money in the World: What the Happiest People Know About Getting and Spending, begs to differ. In her new book, she explains how rethinking your budget and your attitude toward money can create a fuller, more enjoyable life. Excerpts from Vanderkam's interview with U.S. News:

[See 50 Ways to Improve Your Finances in 2012.]

What inspired you to write All the Money in the World?

It came out of my last book, 168 Hours, which is about how people spend their time. Time and money are two closely related variables that tend to move in opposite directions. Optimizing both of them is a tricky undertaking. Time is more absolutely limited, whereas money is a lot more variable.

People have been thinking about money and the economy a lot in the last few years. We're clawing out of a pretty deep recession, and I think there's a desire to be a little bit more mindful of our money. Even as we crawl back out of that, how can we take the lessons we learned from that time and keep them even during better times?

One of the concepts that you mentioned in the book and on your blog is the idea of the "joy budget." Can you tell us more about that?

Budgeting is a pretty dreary idea if you think about it. One of the reasons thinking about money is so dreary is because people don't budget for joy. They don't think about what they'd like to spend their money on, and they also assume that we have to spend certain percentages on various necessities.

[See 12 Money Mistakes Almost Everyone Makes.]

Those budget calculators you find everywhere say you should spend a third of your income on housing. Okay, you can, but if you make a decent amount of money, you could also spend a lot less and still have a pretty good place to live, then budget a lot more money for other things like travel or going out with friends or holding parties.

So, looking at the money you have going out, and thinking about how you feel about all of that and figuring out if there is a way over time to spend a higher percentage of that on things that do make life more enjoyable for you and the people you care about without cutting back on long-term financial security. If there are ways to spend less on things you don't care about, you can spend more on things you do.

Any tips for someone trying to figure out what will bring them greater happiness?

There's a little exercise I have in the book. I call it "the $10,000 question." Let's say you got a completely unexpected inheritance of $50,000, and being a responsible person, you put $40,000 toward retiring any debts you have or to savings or any usual charitable commitments you have. Ten thousand is going to be fun money. What would you spend it on? You want to look back at your life years from now and think that what you spent it on was memorable. So what would that be? It starts getting you thinking about what you might enjoy, and so you can start thinking about ways to bring elements of that into your life now.

[See 10 Ways to Give Your Money a Makeover.]

In exploring money and happiness, what surprised you most?

Spending money on other people turns out to be correlated with happiness, which I think would not necessarily be intuitive. You would think that buying a DVD for yourself would make you happier than buying it for someone else, but that's not actually true, because humans are social creatures and giving things to other people is one of the most natural ways that we have of establishing bonds.

So I learned looking at the research that spending money on other people, gifts, and charity is correlated with happiness. Another thing is spending on your social network. So spending on getting together with friends, spending on experiences--things like travel. All of those are ways to buy happiness, whereas spending money on things you get used to or that consume a large percentage of your budget because they're easily compared with other people is perhaps not the wisest course of action.

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Could give me an example? Perhaps someone's car or house?

Yes, I think that one of the fascinating things about American life is like what I said about spending a third of our budget on housing. That is perceived as the norm across a wide range of incomes. So even if people are earning tons of money, they still do it. And so you wind up getting some pretty ostentatious houses towards the high-end when you think of it that way. Because again, we are social creatures and a big chunk of our view of ourselves comes from how we land in the heap.

But you don't have to do that. It is possible to spend more on things that are not necessarily compared, but that tend to buy you more happiness. No one knows if your marriage is better than anyone else's. No one knows if your dinner with friends was more enjoyable than someone else's potluck picnic. These things are just not easily compared. But they're also enjoyable experiences that are always slightly different, and consequently are more likely to make you happy than something you get used to, like a car.

[See 10 New Retirement Hot Spots.]

What can we learn from happy people who don't earn as much money as others?

We view our lives according to how we land in the heap. That suggests that there's a very simple way to make yourself happier, which is to change your reference group. So if you become unhappy by looking at other people, and [are] feeling poor compared to them, then look at different people. And the world is certainly not short of them. You can compare yourself to villagers in rural India and feel incomparably rich.

Anything you'd like to add?

The quickest way to buy happiness is to treat a friend to lunch. And there are a few reasons for this, especially if you plan it ahead of time. Because planning fun things ahead of time gives you kind of a triple-happiness whammy because you anticipate the experience beforehand, you enjoy it during it, and then you savor the memory afterwards.

[See 10 Essential Sources of Retirement Income.]

Spending on your social network is another source of happiness. So it's nurturing your relationship with a friend. We enjoy eating, of course. And then the final benefit is that if you treat her, so you're spending money on someone else. She will probably reciprocate. So you can have your fun twice.



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