Happy Money – The Science of Smart Spending by Elizabeth Dunn and Michael Norton – Book Review

Books abound on how to make more money and how to manage it to maximize your return on investment (ROI).

Promising professors and researchers, Elizabeth Dunn and Michael Norton, present a new approach to money; focus on how to increase your happiness from the money you spend. They champion five principles, based on international research, to help you achieve this goal, in their new book, “Happy Money: The Science of Smarter Spending.”

They found that around the world, surprisingly, income has little influence on whether people smile, laugh and experience pleasure every day. Dunn and Norton also describe how companies and organizations that apply the principles can benefit their employees, stakeholders, community; and ultimately profits.

Here are the principles of Happy Money:

Buy experiences. Experiences bring people together, fostering social connection; and provide memorable stories you’ll enjoy telling for years to come. They are also linked to your identity or the person you want to become. and offer unique opportunities, escaping easy comparison with other available options.

People who prioritize experiential shopping are seen as open-minded, intelligent, and outgoing. Compare large and mundane purchases and you’ll find that people are more likely to experience buyer’s remorse for material goods. The duration of an experience has little impact on the enjoyment people remember having derived from it.

Make it a treat. “Knowing that something won’t last forever can make us appreciate it more,” Dunn and Norton say. “Recognizing that an end is near holds the key to happiness, helping us turn readily available comforts into treats.”

London is the most popular international travel destination whose landmarks include Buckingham Palace and Big Ben. Native Londoners report seeing more landmarks in other cities than in their home town. When an enjoyable activity is readily available, we may never experience it, thereby missing out on a relatively inexpensive source of happiness.

Companies often practice making certain items available for limited periods of time, making them feel like treats. Think of Disney’s limited re-release dates for its classic movies; and the McDonald’s McRib sandwich, added to fall menus to create nostalgia for summer barbecues.

Win time. “Time and money are often interchangeable.” Thinking about time rather than money often inspires people to engage in activities that promote well-being, such as socializing and volunteering. Time and money foster different mindsets. Focusing on time tends to sharpen the sense of self. Money thoughts promote a cold, rational manner.

Most people would benefit from time changes in:

• Commute. The US Census Bureau reports that Americans spend more than two weeks a year commuting. Taking a job with an hour’s drive each way is tantamount to the misfortune of having no job at all.
• Television. Americans spend an average of two months a year watching television.
• Socialize. People experience the most positive moods daily when they spend time with friends and family, especially children.

Pay now, consume later. “Because of the power of the present moment, people overvalue the present, making it difficult to appreciate the potential benefits of postponing.”

Credit cards numb the immediate pain of paying and promote a kind of detachment that makes even savvy individuals more inclined to part with their money. The researchers asked the subjects to estimate their monthly credit card bill. Everyone underestimated the amount by at least 30%.

When consumption is envisioned in the future, it is easier to see the more abstract benefit of experiences, whereas focusing on the immediate future promotes feasibility. The authors describe people who pre-pay for things, including monthly mail-order cosmetic subscriptions. Experiencing their arrival without paying then resembles “Christmas every month”.

Invest in others. “New research shows that spending even small amounts of money on others can make a difference to one’s own happiness,” Dunn and Norton say.

To maximize your giving experience, put these three tips into practice:

• Make it a choice. Feeling pressured by family, friends, and co-workers to donate to charity or buy fundraising items can diminish the joy of giving. The best charity calls encourage people to give without making them feel like they have to comply.
• Establish a connection. People experience more happiness spending money on strong ties (i.e. immediate family and close friends) than on weak ties (friend of a friend).
• Make an impact. People who report giving money to charity feel richer than those who don’t. When donors see the impact of their contributions, they are more likely to give.

Dunn and Norton suggest that you consider the five principles collectively rather than individually; and find ways to apply as many principles as possible in one purchase.

The authors “zoom out” beyond individual, commercial and organizational purchases; and discuss government spending. They cite government trends to measure and promote the well-being of its citizens.

The best way for governments to facilitate citizens’ ability to spend their money happier is to ensure that all citizens have some disposable income initially.

Dunn and Norton point to the growing divide in the United States regarding rich and poor; and say countries with large disparities between rich and poor have higher divorce rates, longer commutes and weaker social safety nets.

Read “Happy Money” and get a kaleidoscopic view of the power of money beyond numbers and investments.