by FPA member David Zuckerman, CFP®, CIMA®
Last Updated: June 17, 2013
If you’re like most people then much of what you hear from the finance industry is focused on investing. This is for good reason, because successful investing isn’t easy and is one of the most critical aspects of managing your personal finances. But there are other facets of financial planning that are often overlooked.
At the most basic level, financial planning involves controlling expenses by using a budget. And while the importance of sticking to a budget and constructing a written financial plan is often emphasized, using your discretionary spending to maximize happiness is something that has only recently attracted attention. New studies indicate that how you spend your money can have a big impact on happiness.
Experiences vs. Material Things
What kind of spending makes people happy? This question is the focus of the new book, Happy Money: The Science of Smarter Spending, by Elizabeth Dunn and Michael Norton. In order to gain some insight into how different types of spending affect happiness, think about purchases you’ve made to make yourself happy. Consider a material thing that you bought, something tangible that will last, like an appliance, a watch, or a car. Next think about an experience that you bought, perhaps a trip, a special food, or a unique activity. Which type of spending did more for your happiness?
Your answer may be the same as the majority of Americans, with 57 percent saying that the experiential purchase increased happiness more than the material purchase. Only 34 percent felt that material things were better for happiness than experiences. Does this mean that you have to book expensive trips, gourmet dinners, or go skydiving to be happy? Of course not, but it does mean that you’ll probably get more out of a leisurely road trip or a fun dinner with family and friends than you will out of a new purse or piece of furniture.
Does Home Ownership Affect Happiness?
Although nearly 90 percent of Americans described home ownership as a central component of the American Dream in a 2011 poll, many carefully constructed studies actually indicate that home ownership does not have a significant effect on overall happiness. A study of women in Ohio found that renters were just as happy as homeowners.
Another study focused on thousands of people in Germany that moved because they didn’t like something about their old house. These subjects initially reported much higher housing satisfaction, which only diminished slightly with time. In the five years following the move, the participants continued to be significantly more satisfied with their housing than before the move. Yet, this improved housing satisfaction did not translate to improved overall happiness, which remained unaffected by the move.
A third study, which is ongoing, is focused on the amount of money people over the age of fifty spend on virtually everything. So far, only one category of spending in the study has been shown to affect happiness; and it isn’t housing. According to the study it is leisure spending, which includes trips, movies, sporting events, gym memberships, etc. that leads to the greatest happiness and overall satisfaction.1
Does this new research mean that buying a home is no longer a good financial decision? Surely not, as owning a home will continue to be a good investment for many Americans. A home is one of the only investments that you can live in, and paying a mortgage is a good forced savings vehicle. With the mortgage interest tax deduction, buying a home can even be cheaper than renting.
What this research does mean is that you shouldn’t expect a new house or other material purchases to make a meaningful difference in your overall happiness. If you’ve been happy living where you are now, chances are that you’ll continue to be happy in another home. But if you aren’t happy where you are now, don’t expect another home or car to change that. More leisure spending and enhanced recreational activities, however, might just do the trick.
If you need help constructing a financial plan that will enable you to maximize your leisure spending and provide more recreational opportunities, consider finding a CERTIFIED FINANCIAL PLANNERTM from FPA to help you.
FPA member David Zuckerman, CFP®, CIMA®, is Principal and Chief Investment Officer at Zuckerman Capital Management, LLC in Los Angeles, CA. He serves as CFP Board Ambassador and Director at Large for the Los Angeles chapter of the Financial Planning Association.
1 Elizabeth Dunn & Michael Norton, Happy Money: The Science of Smarter Spending, (Simon & Schuster, 2013), 1 – 25