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Thursday, July 22, 2010

How to Spend Money So It Makes You Happy

By Kimberly Palmer

Share ThisThe debate over whether money can buy happiness just got more complicated. A new paper from two economists suggests that spending money on certain things – namely, leisure activities – does, in fact, improve happiness levels. Spending on more materialistic items, such as cars, food, and clothes, does not.

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First, some background: Economists have long debated how money influences happiness levels. On one hand, people in richer countries report higher happiness levels. But after a certain threshold of wealth is reached (GDP per capita of around $10,000), the link begins to weaken. That could be because people get used to higher incomes, so wealth doesn’t bring them as much pleasure, or because once people achieve a certain level of material success, they begin to wish they had even more. People also tend to compare themselves to others, and it’s always possible to find someone else who’s richer than you.

But no one doubts the importance of being happy. For starters, it feels good, but it also appears to improve health and even longevity.

Now, back to these intriguing new findings. By comparing consumption data from the national Health and Retirement Study, Thomas DeLeire of the University of Wisconsin-Madison and Ariel Kalil of the University of Chicago found that spending money on leisure activities, which include vacations, movie theater tickets, and hobbies, improve happiness levels. (Happiness was measured by asking respondents to describe how they felt about their lives.)

Expenditures on durable goods such as refrigerators, clothes, personal items, cars, and housing, on the other hand, did not have an effect on happiness.

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The apparent reason behind the leisure spending – happiness connection is even more intriguing than the finding itself: Spending on leisure activities appears to boost one’s level of social connectedness. That makes sense, since when you go on vacation, engage in a hobby such as tennis or bridge, or go out to the movies, you are almost always doing it with somebody else. So spending on leisure might boost your social connectedness, which in turn improves your happiness level.

What does this all mean for the savvy consumer? Well, it suggests that we should be sure to budget some of our funds towards leisure. While the latest handbag or car might give us a short burst of euphoria, we might soon get used to having them around so the happiness provided is short-lived. But if we spend money on a once-in-a lifetime vacation with our families instead, then we might feel happier and more connected to our loved ones.

One caveat: The study is based on data from older Americans over the age of 50, so it might not apply to everyone. It’s possible, for example, that younger Americans get more of a happiness surge from keeping up with the latest clothing trends, and older folks get more pleasure from leisure. As the authors put it, “For a relatively older adult, an expensive vacation or box seats at the symphony may be happily viewed as the just reward of a long and productive life, something that was postponed until a stage of relative financial security and seniority in one’s position at work or in the community.”

Still, the findings hold a useful lesson for the rest of us, too.

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