Actually, Money Can Buy Happiness. Here's How:

The question of how much we need to be happy has puzzled everyone from philosophers to self-help gurus to, well, us regular folks. My research suggests that money often doesn’t buy us much in the way of happiness — not because it can’t, but because most of us aren't spending it the right way.

Think about where your money goes each month. If you’re like the people we’ve surveyed all around the world — from Canada to Uganda, South Africa to the USA — you probably spend the vast majority of your money on one thing: stuff. Big stuff like cars and houses, medium stuff like TVs and iPhones, small stuff like coffees and snacks.

There’s just one problem with buying so much stuff: all the data suggest that it simply doesn’t make us happy. The size of your house, the price of your car, your fourth coffee of the day — none of these have any bearing on how happy we are with our lives. And interestingly, this seems to be true for people all over the world, rich and poor alike.

So what can we spend our money on to make us happier?

Buy experiences.

Research shows that experiences — from small date nights to big vacations — are a more reliable source of happiness than stuff. For starters, experiences are more interesting than things while they happen. Think how much more enjoyable an evening out with friends is than one spent sitting plunked in front of a TV.

But experiences have additional hidden benefits as well. The days we spend waiting for stuff we’ve bought to arrive generally makes us feel impatient (a negative emotion), but the days before experiences actually fill us with anticipation (a positive emotion). It’s no fun to be pining for your next iPod, but it is fun to fantasize about your upcoming trip.

And experiences beat stuff in the longer term, too. Our TVs get old and outdated soon after we buy them, but trips actually get better in our memories over time. Many people reflect more fondly about their honeymoon than when they were actually sitting in the airport waiting for a delayed flight. Before, during, and after — experiences trump stuff.

Buy time.

In a talk I gave recently, I asked the audience to raise their hands if they felt they could afford to pay someone to clean their house once a month. Very few people did. Most felt that it was a luxury they simply couldn’t afford.

I then asked how many of them had bought a coffee that morning. Nearly every hand shot up. In fact, most people admitted buying not just one but several coffees each day. I asked them to do some math: the price of a few cups of coffee (or lattes!) every day for a month is equal to how much cash? (Take a moment to figure out your own “coffee cash.”) Many folks reported spending more than $100 each month on coffee alone — those trips to Starbucks do add up!

Then I asked a simple question: would you rather drink a little less coffee in exchange for someone cleaning your house once a month? You’d spend the exact same amount of money, but buy yourself better time: an entire Saturday you could spend with your family, or on an experience, or even time to stare at a wall. (Really what doesn’t beat cleaning the toilet?)

This failure to use our money to buy better time arises from our general tendency to focus on specific things — I need a coffee right now — instead of thinking broadly about how to allocate our money to maximize our overall happiness. Shifting our money from buying stuff to buying time frees us up to pursue the things that truly make us happy.

Invest in others.

Buying experiences and buying time both involve shifting from buying stuff for ourselves to buying things more valuable for ourselves. But my research has uncovered an additional means of buying happiness. In addition to changing what you buy, think about changing for whom you buy.

In experiments I've conducted with Elizabeth Dunn, a Professor at the University of British Columbia, we gave people free cash, but with a catch. They had to spend it following our instructions. Some got to spend their money on themselves, but others were told they had to spend their cash on someone else — a gift for a friend, a donation to charity, or any other creative means that allows them to invest their money in others.

Time and again, we saw the same pattern of results. People who spent on themselves didn't receive any happiness benefits — one more coffee doesn't change how we feel about our day. But people who spent on others were reliably happier. And this is true all over the world, even in very poor countries. At a very fundamental level, spending on others gives us the “warm glow of giving.”

Still think money can’t buy happiness?

Then you’re probably just not spending it right. If you'd like to try an experiment on yourself, break your monthly spending into “happiness categories.” Allocate enough of your cash to buying time, buying experiences, and investing in others. Making sure to do this at the end of each month will allow you to wring the most happiness out of every cent you spend.

by Michael Norton