IN THE WORLD OF personal finance, there’s no shortage of formulas and frameworks for making financial decisions. But it’s also important, I think, to see these as guidelines rather than as rules. Consider the textbook view of money and happiness.
What the research says is that, all else being equal, we should opt to spend money on experiences rather than things. Let’s say the choice is between spending $1,000 on a new watch or on a weekend away. The research is clear: Take the trip.
While there’s validity to this, I’m not sure it’s so clearcut. In my experience, people’s approaches to money and happiness vary along several dimensions. For starters, the distinction between “experiences” and “things” isn’t always as simple as the difference between a gold watch and a weekend away. To illustrate this point, HumbleDollar’s editor Jonathan Clements points to the purchase of a car.
A car might seem like it fits in the “things” category, just like a fancy watch. But Jonathan points out that a car “isn’t simply an object sitting in the garage.” Rather, it can be used to facilitate experiences. “You can get in the car and go somewhere,” he says. You can also share that experience with others. And the car might simply be fun to drive, even if you aren’t heading anywhere in particular.
Similarly, a house might seem like it fits in the “things” category. But again, the line between things and experiences can be blurry. Many families place great value on their homes, especially vacation homes, because they facilitate experiences.
There are many variations on this theme. I know a fellow who was once part owner of a minor league baseball team. From an investment perspective, he said, it wasn’t great. He might have even lost money on it. But being an owner of a team was a lot of fun and, for that reason, he’s glad he did it, and he doesn’t worry at all about how the numbers worked out.
This gets at another reason the happiness research should be taken with a grain of salt: Each of us has different preferences. Spending time on the ballfield or in other social situations might sound ideal to some folks, but not to others.
The reality: Happiness defies a simple definition. Over the years, I’ve observed that people define happiness in very different ways. For some, happiness fits the stereotypical image. It’s the freedom to do anything they wish—to retire early, to travel, to live the “good life.” It’s all the things that people imagine they’d do if they won the lottery. But that life isn’t for everyone.
Others think about happiness more in terms of contentment or peace of mind. Along those lines, many people say their definition of happiness would simply be freedom from any financial stress. They don’t need to spend the summer in Saint-Tropez. If they can pay their bills with ease, that’s enough.
Another fly in the happiness-research ointment is that we change over time. For a five-year-old, a new Matchbox car might be the definition of a great day. But at age 15 or 50, those preferences will change. Happiness, in other words, means different things to different people and at different times. Because of that, the route to financial happiness is not universal.
Another reality: Financial choices don’t need to be viewed in all-or-nothing terms. A fellow in my town lives in a home so large that it used to be a school building. But where does he go for his coffee each morning? Dunkin’.
Financial author Ramit Sethi refers to “money dials,” which is the idea that we should feel free to spend more on the things that are important to us and to economize in areas that aren’t. This probably seems like common sense, but it’s another way in which we shouldn’t be overly influenced by textbook prescriptions for happiness. In Sethi’s terms, we can turn the dials as we see fit.
Indeed, frugality can be a source of happiness in and of itself. That might seem counterintuitive, but there’s logic to it. For some people, it affirms their self-image to wear well-worn clothing or to drive a vehicle that’s more downscale than they can afford. That’s what makes them happy. Others pursue frugality because having less debt and more in the bank allows them to sleep better, and that’s their definition of happiness. In other words, for these folks, happiness is derived from neither things nor experiences.
A foundation of economics 101 is homo economicus—“economic man.” According to this theory, every individual is perfectly rational, with the goal of “maximizing utility” for his or her own benefit. Economics textbooks, however, leave out any precise definition of the term “utility,” and that’s where behavioral economists have stepped in, with recommendations like choosing experiences over things. In general, I find the ideas offered by behavioral economists to be helpful. In this case, though, it may be the traditional economists who had it right.
In the end, as long as you can afford to make a particular financial decision, my sense is you don’t need to worry too much about others’ definition of what’s right for you. Because we’re all different, we should each be free to define “utility” in the ways that make sense to us.
That said, there’s probably one rule that everyone can agree on: Don’t spend money just to keep up with the Joneses. In the words of investment advisor Peter Mallouk, “That’s the path to total misery.”