Most people seek happiness. Some economists even think happiness is the best indicator of the health of a society. However, while money can make us happier, studies show that after our basic needs are met, it doesn’t make us that much happier.

This has implications for financial planning because one of the biggest issues we all face is deciding how we should allocate our money which, for most of us, is a limited resource.

An assumption that most people make when allocating their money is that because a physical object lasts longer, it will make us happier for longer than a one-off experience such as a concert or a holiday. It turns out that assumption is not necessarily correct.

Dr. Thomas Gilovich, a psychology professor at Cornell University, has been studying the question of money and happiness for over two decades. Gilovich says, “one of the enemies of happiness is adaptation. We buy things to make us happy, and we succeed. But only for a while. New things are exciting to us at first, but then we adapt to them.”

Rather than buying the latest iPhone or a new BMW, Gilovich instead suggests we derive more happiness from spending money on experiences like outdoor activities, learning a new skill, or travelling. His findings are the synthesis of studies conducted by him and others into the Easterlin paradox¹, which found that money does buy happiness, but only up to a point.

This was measured in a study that asked people to report their happiness with purchases of major material possessions compared with purchases of experiences. Initially, their happiness with either purchase was ranked about the same. But over time, people’s satisfaction with the material possessions went down, whereas their satisfaction with the experiences they spent money on went up.

It’s initially counterintuitive that a physical object that you can keep for a very long time doesn’t keep you happy for as long as a one-off experience. Ironically, the fact that a material possession is ever present in our life works against it, making it easier for us to adapt to. It fades into the background and becomes part of our ‘everyday’ existence. In contrast, while the happiness from material purchases diminishes over time, our experiences become an ingrained part of our identity.

According to Gilovich, “our experiences are a bigger part of ourselves than our material goods. You can really like your material stuff. You can even think that part of your identity is connected to those things, but nonetheless they remain separate from you. In contrast, your experiences really are part of you. We are the sum total of our experiences.”

Shared experiences also connect us more to other people than shared consumption. For example, you are far more likely to feel connected to someone you took a holiday with in Vietnam than someone who also happens to have bought a large screen plasma TV. “We consume experiences directly with other people,” says Gilovich, “and after they’re gone, they’re part of the stories that we tell to one another.”

Even if someone wasn’t with you when you had a particular experience, you’re much more likely to bond over both having visited the Mekong Delta than you are over both owning Fitbits.

It’s an interesting concept – that the things we buy probably won’t make us as happy (over the long term) as the things that we do – especially when we consider it in a financial planning context, which itself is commonly focused on trying to identify our future spending goals and objectives.

While it’s probably easier to budget for the future purchase of a car or a boat, it’s much less obvious how much to budget for future spending on experiences. But if happiness is our ultimate goal, then perhaps this is exactly what we all need to take some time to try and work out.

¹ named for economist and University of Southern California professor Richard Easterlin, who discussed the factors contributing to happiness in his book titled “Does Economic Growth Improve the Human Lot? Some Empirical Evidence”. Easterlin presented data showing that, among developed nations, reported happiness was not significantly associated with per capita income levels.

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