How to spend it

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Life planning with no sense of financial reality or financial advice with no link to your dreams and aspirations are both equally meaningless. Proper financial planning joins the two together and attempts to answer one essential question: ‘what is enough?

Effective wealth management is only one side of the equation. What about the other, just as important, aspect of financial planning:  how do you spend your money once you have it?

You must devote some time to thinking about your spending habits, otherwise, how can you be sure that you’re not wasting money on things that don’t improve your life?

Beyond a modest threshold, studies show that high income and material wealth have no measurable effect on your happiness. Also, taking out a bigger mortgage, commuting further to a higher-paid job, or working longer hours to fund the lifestyle you’ve always aspired to can even reduce your happiness, health and well-being.

So, how do you adjust your spending to maximise your contentment with life? A new book ‘Happy Money: The New Science of Smarter Spending’ contains some useful guidance. The authors propose five key principles which could help you get the highest happiness bang for your buck:

  1. Buy experiences – spending money on expensive material goods provides an initial buzz that soon disappears. In contrast, experiential purchases tend to increase in value as time goes by. We look back fondly on past family holidays, get-togethers with friends and or gain pleasure from recounting stories of a road trip across the USA.
  2. Make it a treat – if something like chocolate or expensive cars becomes commonplace and an ordinary part of our lives, we’ll stop getting pleasure from it. By limiting our indulgences we actually increase our enjoyment, as well as spending our money more effectively.
  3. Buy time – money and time are frequently compatible. Most of us wish we had more free time, yet research suggests that wealthier people tend to spend more time on stressful activities such as commuting and working. It makes sense to structure your spending with this in mind so it might pay to hire a cleaner so you don’t have to spend your free time on household chores or move closer to the office.
  4. Pay now, consume later – in our modern culture of instant gratification and credit card purchases, this principle goes against the grain, but paying in advance has two advantages. Firstly, we receive significant pleasure from the anticipation of a holiday, or whatever we are buying. Secondly, the greater the gap between the pain of paying and the appreciation of the purchase, the more we can enjoy the purchase without dwelling on the cost.
  5. Invest in others – the final point relates to spending on other people, including charitable donations. There is evidence that increasing our spending in this area will increase our own happiness by more than if we’d spent the money on ourselves. To really benefit, we should feel a connection with the cause or recipient and be able to see the impact of our generosity.

Some of these insights are pretty obvious, but do we put them into practice? When it comes to financial planning, perhaps we should all focus as much time and effort on efficient spending, as we do on efficient saving and investment.

Ian Thomas is authorised and regulated by the FCA. This article is intended to provide helpful information of a general nature and does not constitute financial advice.