There's no escaping the avalanche of advice from financial gurus on how to make, save and invest our money. But when it comes to spending money, you're mostly on your own. In their book "Happy Money: The Science of Smarter Spending," behavioral scientists Elizabeth Dunn of the University of British Columbia and Michael Norton of Harvard Business School set out to fill that need. With data-driven research, they give us practical advice on how, why, when and where people can spend money to help them achieve the ultimate goal of happiness. They spoke with Camille Sweeney and Josh Gosfield, authors of "The Art of Doing: How Superachievers Do What They Do and How They Do It So Well" (Plume).
Shopping is more or less a national obsession. What's the biggest misconception we have about spending money?
Michael Norton: Everyone knows it's really, really hard to save money because in order to do it, you have to give something up — but spending money? Oh, spending money is terrific. You just sort of throw some money at something and it's all yours. People believe that buying stuff will make them happy.
Elizabeth Dunn: But what we forget is that money isn't an end in and of itself. Instead it should be a means to an end. It can be used in a way to make you happier overall.
In your book you outline five principles on how to spend smarter to boost happiness. One of your suggestions is to "buy experiences." Can you elaborate?
Norton: Research shows that in most cases, buying experiences beats buying material goods. Say you buy an amazing $2,000 TV. As soon as you put it on your wall, it starts to get worse. A new TV comes out that's better, and you wish you had that instead. The TV starts to depreciate in value the instant it's yours. But say you buy an experience. You go on a trip that also costs $2,000. OK, you might think, "Well that's not as good as the TV because I still have the TV." But although it's rare to reflect back on a time when you bought a material good, it's very, very common to reflect back on a vacation. The real value of experience comes not in the moment but later on. And even better, as the results of one study show, our memories are built such a way that we see experiential purchases as rosier and rosier over time. So our TV is getting worse and worse over time, but the vacation is getting better and better every day.
How can people change their attitudes toward their spending habits?
Norton: Research shows that material purchases may not make us less happy, although they certainly can do that, but the point is that they just don't really do much for us. Instead of buying things that we think we should have because culture says that they're important — a bigger house, a new car — we're trying to get people to think before they reach for their wallet or credit card and ask themselves, "Am I really spending this money in the way that's going to give me the most happiness?" And if not, we want them to think about spending it in a different way.
Dunn: Often, a product right at your fingertips creates a desire. But putting a little bit of distance between yourself and your desires can help you from falling into that trap. If you see something amazing at the mall you can think, "OK, I can have this or … I can wait. And if I still want it in a week … OK, fine, I'll go ahead and get it."
You make the point in your book that when we're making a purchase, we don't always factor in the value time. How can we be smarter about that?
Norton: Say someone buys a large house. A large house can be terrific. The problem is, large houses are often in the suburbs. So, you've also bought yourself a two-way commute every day of the week for the rest of your life. You've bought yourself thousands of hours of sitting in your car in traffic. Research has shown that commuting is one of the worst things for happiness that humans do. Do you really want to make that trade-off in terms of your time? If you buy a TV, what are you committing yourself to? Staring at a wall for thousands of hours.
Dunn: Changing the way you spend your time is the route to happiness, but we often look at money as the ultimate end point. If instead we think about time as an end point, we can approach these kinds of trade-offs differently. We can step back and say, "Is saving $10 or $20 worth the trade-off in terms of time?" When you make time the ultimate dependent variable, you really transform the whole way we think about our lives.
One of the ways you suggest to spend smarter is to "pay now, consume later." Should we retire our credit cards?
Dunn: Increasingly the world makes it easier to pay later and consume now. So you're fighting not just your own impulses but the way the world is set up. But research has shown that debt has a very negative influence on happiness. People think about debt on a day-to-day basis. You're driving to work or walking your dog, and what pops into your mind? That looming debt. The best thing to do is to pay it off before you think about buying experiences. Debt can be particularly toxic for marital happiness.
Norton: On the other hand, if you pay for something ahead of time, you have no worries about debt, and when you actually have the experience or get the product, it feels completely free. People describe cruises in this way. Pay for everything months in advance, and by the time you go, everything feels completely free.
Is there a poster child for "Happy Money"?
Dunn: Warren Buffett. People look to him as a guru on how to make more money. He is that. But perhaps more important, he provides a model for how to spend that money. He's a kajillionaire — but also a pioneer in not indulging in spending that level of money on material goods, instead giving away so much and encouraging others to give as well.
What advice do you give to those who don't have Warren Buffett money about your principle to "invest in others"?
Dunn: Studies show that people with lower incomes actually give more to charity and are more prone to empathize and recognize the challenges that others face. We found in our research that even people who were struggling to put food on the table benefited from giving to others. There seems to be this hardwired proclivity for humans to experience joy from helping others. So giving is not at all limited to wealthy people. Research shows that giving away as little as $5 to someone who needs it has good benefits for the giver. So I say, "OK, think small. Think about the money you spend on a Frappuccino and use that to benefit someone else."
Do you do interventions at shopping malls?
Dunn: We'd be kicked out by security. I still have to do interventions on myself. I've done all this research, and then I see the new iPhone, and I think, "Oh, I want that!"