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Can Money Buy Happiness? Yes!

This post has been written by Janardhanan Vembunarayanan (Jana), the lucky tribesman 🙂 who recently attended Warren Buffett’s 2013 shareholder meeting in Omaha.

Dan Ariely recommended the book, “Happy Money-The Science of Smarter Spending“. I went to the public library and got the book. It is a very good read and here are my notes.

What This Book Talks About…

Most of us seek professional advice on how to earn, save and invest our money. When it comes to spending money, we follow our intuitions. Research shows clearly that our intuitions are wrong most of the times. This book explains how to get more happiness when spending our money. It uses 5 principles…

  1. Buy experiences
  2. Make it a treat
  3. Buy time
  4. Pay now, consume later
  5. Invest in others

1. Buy Experiences

In 2010, according to the U.S. Bureau of Labor Statistics, the average American household earned about $62,000 before taxes and spent a total of around $48,000. Housing costs along came to $16,500, which accounts for 27% of the cost. This clearly shows that we spend a lot of money in housing either in the form of rent or mortgage. Does buying a big beautiful house increase our happiness?

There is almost no evidence that buying a home or a newer, nicer home increases happiness.

Between 1991 and 2007, researchers tracked thousands of people in Germany who moved to a new house because there was something about their old house they didn’t like. Immediately after settling in to their new abodes, these movers reported being much more satisfied with their new homes than they’d been with their old ones. Humans are adaptable creatures, however, and research show that people often get used to whatever they’ve got. So we might expect that this initial spike in housing satisfaction would wear off, leaving people no happier with their home than they were before moving.

But that’s not what happened.

Satisfaction with the new home only were off a little bit, and in the subsequent five years, movers remained significantly more satisfied with their new home than they’d been with their old one.

Sounds promising, but there’s just one problem…

While movers satisfaction with their houses increased substantially, their satisfaction with their lives – their overall happiness – didn’t improve at all.

Long after the crash of 2008, almost 90 percent of Americans continued to describe home ownership as a central component of their dream.

In a carefully controlled study of more than six hundred women in Ohio, homeowners weren’t any happier than renters, though they were 12 pounds heavier.

Virgin Galactic, is a company which makes it possible for people to pre-book a ticket for a six minute spaceflight.

But wait it will cost $250,000 per person. Does this make any sense? Excerpt from the book…

As a child, Marcia Fiamengo, thirty-year-old nuclear engineer, dreamed of being an astronaut. When she and her husband John (also a nuclear engineer), first heard about Virgin Galactic, they talked about buying two tickets – when they were old and retired, since the six-figure fee was out of their price range as young professionals. Then in 2010, Marcia’s life change in an unexpected and devastating way. John became sick and passed away when Marcia received the money from John’s life insurance policy, she couldn’t imagine doing anything with it, and put it away while she grieved.

And then one day…

What better way to use this money than to honor their dream and buy a ticket to space? As Marcia put it, John’s death reminded her that “life is short and fragile” These amazing experiences shouldn’t be put off until a better time. You may never get the chance to experience them.

This story reminded me of the movie “Up”…

The point the authors are trying to make is…

Purchases which buy experience makes people more happier than the materialistic ones.

The happiness I got from visiting Berkshire Annual Meeting is much greater than the Laptop that I purchased. You see the difference.

I am standing in front of Buffett’s house 🙂

buffetthome

2. Make It a Treat

I used to drink ‘Cafe Mocha’ from Starbucks everyday. When I started drinking it used to be a treat. After sometime I did not have the same enjoyment. So why I am drinking it? It is because of the Habit. Should I spend $3.25 everyday for it, even though I do not really enjoy? Why am I not enjoying?

Because we lack mercury’s amnesia, the enjoyment of chocolate coffee typically declines over a period of time

So, what is the solution?

Switch to regular coffee at home or work. This helps to save some money. Once in a while treat myself with Starbucks Coffee and it becomes a treat for me. The point authors are making is…

Limiting our access to the things we like best may help to “re-virginze” us, renewing our capacity for pleasure. It also helps us to save money.

3. Buying Time

Today lots of professionals are making a decent amount of money. But the only problem is, most of them do not have time to do what they want to do.

At Intel an employee receives 350 emails every week. It takes 20 hours to manage them. Around 30% of the emails are unnecessary. What did Intel do?

Intel recently experimented with “email-free Tuesdays” encouraging a group of employees to spend four hours unplugged from email and phones, giving them an uninterrupted period to, you know, think.

This feeling of time affluence has important implications for happiness once these employees leave work for the day.

Google Engineers spend 20% of their time on pet projects, that are outside their day to day work. Some of the innovative products like Google Sky and Gmail came out of this.

When people at google talk about what they like, it’s one of the things they like about. It is culturally important. Knowing that it exists causes people to fee more free.

4. Pay Now, Consume Later

In today’s world most use credit cards, It follows the policy of “Consume now and pay later” The problem with this is, we overspend. American household had an average of more than $6000 in credit card debt in 2010. By doing the opposite – by paying upfront and delaying consumption we get the following.

  1. Less spending
  2. More happiness

Delaying consumption allows spenders to reap the pleasures of anticipation. This reminds me of my childhood days. Deepavali is a festival of lights and it is very famous in India. I anticipate its arrival one month before. The excitement I receive in the anticipation is same as the enjoyment I have during the festival.

Tripadvisor.com business runs on this pleasure of anticipation.

Barbara Messing, Chief Marketing Office at Tripadvisor.com, says: I think of tripadvisor as being in the happiness business. We are really upstream in the planning process and I believe that people derive as much pleasure from that phase as from the trip itself.

5. Invest in Others

Bill Gates and Warren Buffett asked American billionaires to pledge the majority of their wealth to charity. Buffett decided to donate 99% of his wealth to charity. He claims his happiness increased when he gave.

DonorsChoose.org is an online charity that makes it easy for anyone to help students in need. Public school teachers request what they need on the website. The requests can range from pencils to microscopes. Anyone can donate any amount to the project that most inspires them.

In all research has shown that spending money on others provides a bigger happiness boost than spending money on yourself.

Makes sense, isn’t it?

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About the Author

Vishal Khandelwal is the founder of Safal Niveshak. He works with small investors to help them become smart and independent in their stock market investing decisions. He is a SEBI registered Research Analyst. Connect with Vishal on Twitter.

Comments

  1. Narayana Mukkala says:

    I missed reading a few of your posts recently and bumped on this mail.. I read thru this post and said to myself …Ya, it makes sense, wow… thts 100% right, gosh ! he nailed it… wait… thats true !! ….. After reading it all, i am telling myself, why the hell i missed reading previous articles – I love your posts and much more than anything it motivates people, atleast ME definitely – continue this fantastic job.

    I also wanted to post some thing that i heard on TED Talks recently, i will try to connect back with you on that once i get some free time. Sorry for the excuse 🙂

    Thanks
    Narayana Mukkala

  2. Rajaram S says:

    Hi Vishal,

    I liked the part, “buy experiences”. Best of all, many great experiences need not be “bought”, they are available in abundance in nature, as long as we take careful responsibility for things that we are given by nature for “free”.

    However, we are now getting into a very subjective part, which is how people should spend. That is the funny part of finance. We tell people how to spend, and invest. But when a large sample of people start following that, all the investment and spending theories get negated due to the large sample. I guess that is why “wise contrarians” succeed in all walks of life. I borrow a theory from quantum mechanics here, which is that the more the position of things are observed, the less we can know their momentum. Similarly, the more we observe the momentum, the less we know about their position!

    So clearly, finance is a highly subjective phenomenon. How should we invest, how should we spend, how much to invest, how much to spend, how much to earn, what are necessities versus luxuries, etc etc are highly personal and subjective. But if anything, some basic principles still apply to all (as clearly captured in the book, “The richest man in Babylon”). Earn income (same as grow crops in the olden days), save atleast 10% of the income (store grain for rainy days), then spend the rest (eat). Either keep the savings under the bed, or carefully handover the savings to someone with integrity whom we trust, someone who has clearly demonstrated that he knows how to preserve and multiply wealth through a clever but honest business sense. Or else, if we can, be that someone who is a clever, but honest businessman, whose business will last a long time!

    Regards,
    Rajaram

  3. Awesome post. Never thought that spending can be prioritized…

  4. Happiness vs. Pleasure seeking

    One of the best sports captain, Imran Khan, in his autobiography writes:

    “By this time I had come to the realization that the hedonistic lifestyle that had seemed so appealing from the outside was a mirage. The hurt I caused and the feeling of emptiness I experienced in transitory relationships far outweighed the moments of pleasure.

    Most of the jet set I knew and socialized with in the 1980s could not face a party unless they had enough alcohol or drugs in their system. It was a world completely cut off from the rest of humanity.

    I also began to question the things I had always
    assumed were great fun. The people I was hanging out with had been conditioned by Hollywood-led trends and peer pressure to believe nightclubs, beach and yachting
    holidays, expensive restaurants and designer clothes made you happy. But parties and nightclubs began to bore me, as did eating out, which had once seemed so much fun.

    I began to crave home cooking, while years of cricket tours made me hate the sight of hotels. Once I began to change my lifestyle I realized there was a world of difference between happiness and pleasure-seeking.”

  5. Jana Vembunarayanan says:

    Thanks Asim for sharing the autobiography of Imran Khan.

    In one post Vishal wrote ‘Work Less = Earn Less = Spend Less = Live More’ which is applicable in today’s world. Most of us work hard to earn more to spend more. The worst part is we buy things which others are buying and thus boosting our ego.

    In all we are living in an illusionary world.

    Regards,
    Jana

  6. Another very helpful summary of a good book.
    The 5 points/perspectives are different from what one normally encounters. Pay now and enjoy later I practice on myself, except for the house that I had to buy.
    Consumer goods (perishable or those that have versions coming out every 6 to 12 months) must be paid upfront. In other words stretch your legs only that much which your bed sheet permits !!
    Thank you for this post.

  7. Very true… However ‘Buy Experience’ is a very subjective call. I have seen people who buy experiences just because others have bought them. This whole ‘Neighbour’s Envy, Owners Pride’ attitude is very costly when we buy experiences. Bcos we end up paying exorbitantly for experiences that we may not cherish fully…

    • Yes, experiences would be a tough one. Unless you experience you dont know what it is and for that you have to pay !!

  8. Reni George says:

    Dear Vishal
    Good evening to you
    Let me write a poem first

    Happiness lies in good health,Not in accumulation of wealth
    Happiness lies in caring for others,Like dear friends and brothers
    Happiness lies in sharing,Not is amassing
    Happiness is the state of mind,Nowhere else you can find
    Enjoy the moment, live the life,Settle score and end the strife
    Happiness is the journey not destination,Happiness Is doing what is your fascination
    Happiness is doing what you like,Sleeping, walking, running and riding a bike
    Happiness will come near,When you will venture without fear
    Render service that you can,Live a life that adorn a man

    So can money buy happiness,it may for some and may not for some,….but for me money buys is mere the illusion of happiness….it is just short term booster….and these has come to the knowledge of the marketers and they are using this short term booster like drugs give a short term boost of happiness.

    Lets take the example of smartphone…right now the maximum usage of a phone goes beyond a year..till that time the companies come with some additional feature…which may be a useless point but then also it will be presented in such a way that they would mean to say it makes your life far more simple and entertaining.Apple has amassed large hordes of cash from these type of people who were in search of such short term boosters of happiness.

    The problem lies in understanding the concept of happiness.Being with the nature,even for a short period of time gives you a long sense of happiness..then buying a materialistic product…because a superior form may short live that happiness.

    So First of all need to understand what is happiness…is it the tea time with you friends and family….enjoying the monsoon on your bike…running in the countryside…..standing at the sea-shore watching the sun rise….

    Thanks and Regards
    Happy investing in Happiness

    Reni George

    • Dear Reni, thank you so much for sharing the poem! Yeah, I second your thought on how companies are using tricks to provide temporary happiness to people and in the process bossing their profits. It’s however the responsibility of the consumer not to give in to such tricks.

      As they say, the biggest problem with the rat race is that, even if you win, you are still a rat. 🙂 Regards.

      • Companies market all these things that you don’t need using advertising. Half of the time you’re watching TV is spent watching the same advertising over and over again.

        That’s precisely the reason I don’t have a TV.

Trackbacks

  1. […] Can money buy happiness? A tribesman, Jana Vembunarayanan, writes that it can…and explains how to get more happiness when spending your money. On a side note, given that Jana resides in the US and the rupee has touched 60 to a US dollar, he certainly seems to be happier sending money home. Mental Model of the Week: Process vs Outcome […]

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