Financing Happiness – Let’s spend !

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Efficient spending is a very important tool of financial success. How can we use it wisely ?

As a financial advisor, prospective clients are expecting me to work on their investments, revenues, taxes… and various “revenue-side” topics. Fine.

What they are not expecting is that I also talk to them about the “spending-side” of personal finance. And I do. A lot.

Because it matters.

Because spending money efficiently can reveal as tricky as correctly earning money. I mean spending the right way, the way that will make us happier. I am by no mean perfect on this, but I can share some tips, that I give to clients, and try to follow.

So how can we spend our way to happiness ?

 

What this post is not about :

This not a budgeting lesson. While budgeting is an important financial tool (albeit boring), I won’t talk here about how we can spend less. Not the point. Let’s go and spend ! But let’s spend better.

This is neither a negotiation lesson. I would not be able to do it anyway.

Finally this not about investing. Every kind of “I buy those watches/cars/wines/pokemon cards because they will be worth a fortune in ten years” argument is off-topic too. This might be true but not the point here. We spend we do not invest.

Those set appart, let’s get into the fundamentals of efficient spending.

Happiness and money

No surprise here, this is one of humankind’s most cliché questions since, well ever.

Does money bring happiness ?

And before the invention of money it was probably something like “Does owning more sheeps, cows, lands or primitive tools brings happiness”. Long time issue…

…which is still debated. But we have good clues now. Indeed money is not always directly linked to happiness BUT :

– Under a certain level of wealth, money IS directly linked to happiness. Period. There is just no way we can convince someone who can barely afford food, is at risk of becoming homeless or who cannot afford simple Christmas presents for his kids that : “believe me dude, money won’t solve your problems !”.

Actually money would literally solve every single problem he or she has. I would strongly recommend, would you haven’t done it already to go and watch the movie “The pursuit of happiness” starring Will Smith. Amazing way to illustrate this.

– But, once you managed to sustain your most basic needs (safety, food, housing, healthcare), for your loved ones and yourself, then the effect of “more” money on happiness starts dwindling, slowly but surely.

Of course it still has effect, especially (as we will talk about later) if we spend efficiently, but the higher we get from there, the lower the marginal effect of money on happiness will be. For my friends the math nerds out there, the relation between happiness and money could be represented somehow by a square root function.

– Then there is a point where the marginal effect of money become so scarce, so insignifiant on a daily basis, that it then takes massive amounts of money to get just a little more happiness. In fact, past that point the relation between money and happiness can actually reverse. This is due to the enormous amount of time and stress that one can spend on maintaining large wealth.

For those who want to get a little more academic on this, I would suggest to look at the studies from Deaton and Kahneman (2010), Killingsworth (2021)  and their joint adversarial collaboration.

But, to cut it short, here is the basic answer to “does money bring hapinness?”: of course under a certain amount, a lot less not after that, and very marginally ever after.

Let’s focus on this middle part where we actually CAN do something to improve the relation between money and happiness.

So what is this about. How to get a better use of our money ?

First we have to identify what will make us happy on a very core level above basic needs. I can count 6 (but this is just one way to formalize it of course) :

Fulfilling relations with family and friends, freedom, passions, fitness and finally purpose.

Those are the core leverage to improve our happiness above the satisfaction of basic needs. I won’t get too much into detail of each of them now, as they are pretty intuitive.

Everything we buy above basic needs should be focused on those. Therefore here are four very simple principles of happiness-efficient spending that we can apply to fulfill those needs.

Let’s get then to the fun part. Let’s get spending !

Buy experience not possession

This is a big one. Experience is worth more than possession for the reason that possession is, most of the time, a promise of experience, and has no happiness value in itself (with one exception, see below).

If we seek possession for its own sake, we are fooling ourselves. And we might never get the experience we are fantasizing to get through it.

What ?

I know, I know, I am getting a bit too abstract.

More down to earth. Why would someone (one example among many) gather a wine bottle collection/cellar ? He might think that he likes owning fine wine. Yes, there might be a direct small “passion-related” happiness in the actual process (experience) of buying the wine. Fine.

However, he probably does this more because he projects himself experiencing it. May it be by drinking it, sharing it with friends and family, or talking about it to other people, the happiness he will get from it, will come later, or, and that is problematic, maybe never, or at least not as strongly as he thought.

I won’t talk either about my wife’s fabric passion (addiction?). No I won’t…

Apart from choosing experiences that do makes us happy (we will talk more about this in the next paragraphs) we have therefore first to understand the real reason why we crave for or keep owning specific possessions.

What is the real experience I am looking for ? Can I live it without the time (and money) burden of possession ? Will I really live it the way I imagine it anyway ?

As owning stuff always come at a cost, may it be money, time or stress, sometime quite insignificant, sometimes the opposite. Which means that owning what you could “rent” (in the wine collection by buying a good bottle whenever needed) is a decision that should be wisely taken. In the case of my wife by buying just what she does need for her immediate sewing projects.

As hinted above, I admit that there is one good enough reason to own specific objects : collecting, which is when our passion is dedicated to seing, creating, restoring and/or manipulating specific objects, but we have to be fully aware of what we pay for this, as the collecting experience of acquiring a new object has a caveat : it does not last, it is fading quite fast, and we need another new object. Addiction you said ?

To summarize this in a more practical way here is a basic list of possessions that I think we should be very cautious about :

• Fancy cars, of course. The actual positive experience of owning a fancy car is actually quite limited, and fantasized.
• Clothes, watches and jewellery, wines…
• Expensive collections of any kind (is this really a passion we cannot enjoy without owning it ?)

As we now decided to focus on experience let’s turn to what kind of experience we should buy.

Buy family, buy friends

OK. This is clearly catchy. But it is true.

We do want to have fulfilling family or friend interactions, and money can help a lot with it. What we want to buy is not (obviously) “family members or friends” but positive social interactions.

As we cannot buy social relations, we can however directly use our money to buy experiences that will be shared and remembered, thus creating links and memories. Links bring confidence and optimism, memories make them stand time.

Having a nice outdoor drink in a fancy bar on a warm summer evening with friends is not free. It is not that expensive, but it is not free. Same goes for many other link creating interactions.

For the bit older folks here, you probably remember the Mastercard “priceless” commercial campaign where, among other situations, a dad brings his son to a  baseball game, buys tickets and popcorn, then comes the commercial slogan :

“There are some things money can’t buy. For everything else, there’s Mastercard“

Those commercials where brilliant. The experience of going to a football match with your son is not free. You have to pay for the tickets the ride and the food, and take the time to go. So yeah, you need money, and time (which does have value!).

Another example (way more expensive one) is the secondary house “country house” or “beach house”. You can rent them or buy them. As I hinted before there are some experience that cannot be bought without possession.

The “family safe haven” effect of a secondary residence is one of them. This is the experience that is attached to the place where memories are strong and positives and your family and you have a feeling of security and inner peace.

Buying time in such a place is a good buy. It will make us happier.

But you can also buy or rent those places in order to create or meet friends. Expensive places are not so only due to their inner quality, but mostly because of the social life that they allow.

• Take time to have regular lunches and coffees with friends and family members
• Plan regular week-ends out and travels.
• Rent stays in a place where you know you will meet and join friends, or share memorable experience with others.

Buy to give not to keep

Then a short but useful principle.

Giving makes us way happier than receiving. We should give.

I don’t know for yourself but the Christmas part I prefer is when people open the presents I gave them. I do like receiving presents (duh…) but the real deal in this tradition is the bound we create through it with family members. The excuse to give.

This is also the reason why I advice clients who have time consuming and painful experiences about renting their secondary houses, to think about inviting friends even when they are not there. They will therefore “buy” (though missing income) the happiness boost of giving something very valuable to friends or family.

The same goes, with a twist, with charities or causes. Giving to charities or causes that matter to us won’t make us friends or family links (directly), but will make us happy through a genuine feeling of purpose. Being useful.

So we should :

• Offer presents to people we like. This, very cynically, will make US happy.
• Think about offering the experience of something we own. Renouncing an income is giving.
• Give to cause and charities, and this can include giving time of course.

Buy time and freedom

Finally let’s talk about this final and essential principle.

Some of my clients have a outrageous financial problem. They don’t really know what to do with their money. They have too much money… relative to their perceived needs. Those are usually moderately wealthy, but they just have reasonable overall needs.

They have a home that fit them, a nice family they live with, friends. They give regularly. They did put aside for their kid’s education and their retirement situation is looking pretty good.

Good for them, but…

Their job is interesting albeit very time consuming and not very purpose-oriented (in their own view). They therefore postpone (to when?) family of personal projects.

So they ask me, what can I buy with my money ?

I answer : money can buy the most valuable currency, time.

Buy time. I am no genius to tell you that, we all know it. Time gives us the freedom for our passions, fitness, friends, family and purpose… all of them.

Time is the ultimate leverage money can buy. It allows us to work on the very things that make us happy. Buy buy buy it !