The Science Behind Spending Money

You'd think we would know how to spend our money in ways that bring us the most happiness, but psychologists suggest we suck at it.

This week I found it out for myself. I turned my house upside down after losing my watch. No sign of the watch, but I did find plenty of junk I never use: An Ab King Pro. Kochie's Best Jokes Book. My ironing board.

While there're plenty of studies debunking the idea that earning more money makes you happier, there's far less research about how to spend in order to maximize your happiness.

So, after I sold my junk on eBay (where my watch probably is by now), I started researching what shrinks suggest are the keys to smiling all the way to the checkout.

1. Build Anticipation

My grandmother often advised, "The best girls will make you chase them, but you'll like them even more when you eventually start courting." (Decoded for Gen Y: Courting = Dating).

The same goes with spending. Research suggests the more time you spend analyzing your buying options, working hard to pay it off, and anticipating the day you get to experience it, the more happiness it eventually brings.

Yet in today's need-it-now world of credit cards, instant approvals, and buy-now-pay-a-truckload later, people rarely wait for anything. Lay-buy shopping provides a textbook case of building anticipation. (Decoded for Gen Y: Lay-buy = purchasing something but not taking possession of it until you've made the final payment).

2. Don't Adapt

A lot of the research on how to spend to put a smile on your dial comes from the US. A recent feature in the New York Times suggested an upside to America's downside is consumers are decreasing their spending, increasing their savings, and opting for a simpler life (Justin Bieber aside).

Commenting on this new approach, an academic suggested in the Times article that we quickly tend to become accustomed to it regardless of what we buy. (You've probably experienced this in your own life. Remember your excitement the day you picked up your current car?

One way around this is to regularly buy lots of little things rather than one big item. An example given was rather than buying a top-of-the-range car, instead choose the base model - and then spend the money you saved on many small, preferably weekly, pleasures: a massage, flowers, a nice bottle of wine, etc.

3. Social Studies

Author of How Much Is Enough Arun Abey argues that in many instances you can decrease your spending and increase your happiness.

When people are asked to reflect on what gives them the most smile for their pile, it's usually remarkably simple, low-cost (and even no-cost) pursuits. Abey says, "A few hours chatting to a friend over a pot of tea goes a remarkably long way. Or an occasional night out at a show, followed by a cheap and cheerful restaurant with good mates".

Marketers are skilled at getting us to buy by purposefully associating emotions and experiences with the goods they're flogging. They do this because they know we value experiences (and interacting with people) over material goods.

4. Ditch your Debts

The AMP NATESEM Income and Wealth Report released last month showed we're some of the happiest people on the planet.

The study found that "a person's income would need to increase by hundreds of thousands of dollars to improve their happiness by a single point on a scale of 0 to 10". However, it did find a situation where money led to a lot of unhappiness: having personal debt.

I advise people to pay off their credit cards so much on my TV show that it's almost become a cliche. Yet the average Aussie has over $3000 on his cards - and it's generally the people who can least afford it who have the most of it. Debt is a claim on your future labour (with interest), and it's also the number one way to go broke.

5. Try the Two Week Challenge

Most people think their money goes in big ways: the mortgage, car, groceries. But a significant chunk of change slips through our fingers and adds nothing to our overall happiness.

The two-week challenge involves writing down everything you spend your money on for a fortnight. (If you have an iPhone you can download a budget tracker like iXpenser). Everything.

I've done this challenge with literally hundreds of people, both rich and poor, and it never fails to uncover some surprising results. Usually just how much money they waste on impulse buys - stuff they couldn't care less about. After they've looked at the evidence, all that's left is to encourage them to direct that money toward more meaningful experiences... and fewer books from Kochie.

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