A few months ago Linda Lombardi, a writer for the website Learnvest, asked us if she could conduct a Q & A to learn how our research helps people spend and save their money in ways that result in the most happiness. While much of that conversation recently appeared on LearnVest (and parts of that article are re-posted here), there were a few answers not included in the article which we thought warranted some attention. So, what follows below are highlights from our conversation.
Q: What does your research tell us about ways to trick our brains so we don’t overspend?
There are things you can do to limit the pleasure from buying in the moment. What we found that was a little bit of a surprise is that there’s something about tracking your spending that takes the emotional enjoyment away from it. People report to us that when they’re shopping without a plan, without having to track, it’s an emotional experience - they get a lot of enjoyment out of the actual process of shopping. Just the knowledge that they’re later going to have track it makes it more difficult to make emotional, spur-of-the-moment purchases. So one way you can train the brain is to tell yourself that anything you spend, you have to write it down. By doing that, you take the emotional, addictive quality of shopping away and make it rational, and you’re much more likely to spend your money in wise and less impulsive ways.
Also, there’s really good research that shows that the pain of paying is much less painful when you’re paying on credit. For a lot of convenience reasons, people use credit cards, so there’s not an immediate painful experience that would make you think twice about this purchase. That is why, when people take our money management quiz, one of the things we tell them is if you think you’re not managing your money well, the most obvious place to start is with managing your cash. Psychologically it’s more difficult to use bills - you’re not pushing the pain into the future.
Q: What are the most important things your research shows about how to be as happy socking money as spending it?
Actually, Gallup came out with a poll recently that said that most people report more enjoyment saving their money than spending their money. But there’s a difference between enjoying something and actually doing it - I might say I really enjoy running, but I tend to eat more doughnuts.
I think part of the problem with savings is that most people don’t have a goal for their savings.
There’s tons of research that shows that one of the best things you can do is have a tangible goal that you’re saving for. You get a lot of anticipatory happiness from savings – you think, I’m going to Paris, it’s going to be awesome, I’m going to eat cheese – and that brings us lots of joy.
People need to have a vision - that’s why all the marketing materials for retirement are about what kind of life you want to experience.
And you want to have a goal to do something, not to avoid something. If you don’t have anticipatory happiness, you’ll say, I want to enjoy the fine things in life right now. You’re much more likely to be successful if you have a tangible goal you’re trying to reach.
Q: What if you don’t have a lot to save?
People think that if you can’t save a lot then it’s not worth doing. My colleague Peter Bielagus talks to college students about trying to get them to save, and the average college student will say, literally I can’t save a dime. He’ll say, OK, how about you start with a penny? I want you to save one penny a day. Saving, like any behavior, is reinforcing and becomes addicting.
Q: One of the questions your lab investigates is “Can money make us happy if we spend it on the right purchases?” Let’s say I just received a $1,000 tax refund, how do I figure out what ways to spend it would make me happiest?
Basically, there’s three things you have to do to maximize your happiness though your financial choices. The first is you have to get out of credit card debt. You cannot go into debt to make yourself happy. You may get some momentary happiness, but the financial stress will overwhelm that and make you worse off. Financial stress is pretty much the worst thing in the world for your happiness.
Then, once you have a little discretionary income – positive psychology in general says that if you want to know how to make yourself happier, find people that are happy and mimic their behavior. Happy people have a particular pattern they use to spend windfall money when their essentials are paid for. They take about 25% and save it or invest it. They take about 12% and give it to charities or religious organizations or gifts for other people – basically, pro-social spending. And they spend about 40% on life experiences. Those are the three most salient characteristics of their spending habits.
So if you believe that the best way to be happy is to mimic the behavior of happy people, that would be an interesting way to go about it. We’re going to test this this fall – get people to match a certain pattern behavior and see if it makes them happier.
Beyond The Purchase is a website dedicated to understanding the psychology behind spending decisions and the relationship between money and happiness. We study how factors like your values and personality interact with spending decisions to affect your happiness. At Beyond The Purchase you can take quizzes that help you understand what motivates your spending decisions, and you’ll get personalized feedback and tips. Your answers will contribute to our research as well.