The Smart Way to Spend Money

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Photo by Eduardo Izquierdo

“Money doesn’t buy happiness.” Who among us hasn’t heard this phrase?

Well, most of us disagree, at least a little. This is because money can seem to make us happy.

But it can also drain our life of all meaning, as we work long hours at a job we don’t like only to come home too tired to enjoy our few remaining waking hours.

Several years ago, my husband and I found a way to approach money that had a positive effect on our happiness. Now, three years later, we have become quite good at it – so I would like to share with you what has worked for us.

Allow me to begin with an example. Long before I changed my perspective, I went to purchase an electric piano. I was very excited about it. I planned to spend what I thought was a considerable, but reasonable amount on this purchase.

I walked into the store, and went straight to a piano within the predetermined price range. I tried it, and I liked it.

But then something happened. Looking around, I saw other pianos. I decided to try some of them, with slightly higher price tags. And then a little higher and a little higher.

And, not surprisingly, I found a notably more expensive piano that I liked better. I bought it.

I now have a large, fancy acoustic-looking electric piano at home, which costs about half the price today as it did back then.

Was using the extra money really so bad? Did it not make me happier to have a nicer piano? Well, yes, I was a little happier with the better piano.

But the more important question is how did this affect my overall happiness? Would I have, for example, been happier with the cheaper piano and, say, several months of cleaning service instead of the more expensive one?

In my case, the answer is a resounding “Yes.” It seems so obvious to me now, but I didn’t even think about that option back then. My only thought was on the superiority of the more expensive piano.

Smart Money: Thinking Holistically

This brings me to my main idea: locally versus globally optimal choices.

When making a purchase, a locally optimal choice is one that only takes into account the immediate problem at hand. In my case, I wanted to buy the best possible piano that I could afford.

However, if we consider my purchase in the grand scheme of things, buying the more expensive piano made little sense, given my very own priorities.

The more expensive piano only increased my happiness by a little, whereas I would have been much happier had I purchased the cheaper piano and spent the remaining money on a cleaning service.

A globally optimal choice is a holistic approach that includes considering other ways we can use our money, as well as the time that we spend making it.

But before we talk about time, I should note that it really is difficult, when buying a piano, or a car, or a house, to settle for less than we can afford.

More expensive houses generally look nicer. More expensive cars typically ride more smoothly and feel more comfortable. More expensive pianos sound better.

But, the sky in the limit, as there is a product for every price. The key is to consider the big picture, and make choices that make the greatest impact on our overall happiness.

If we only make locally optimal decisions, a very simple thing will happen. When we go house hunting, we end up spending the full amount for which our mortgage was pre-approved. When we buy a car, we buy the nicest one we can possibly afford.

We have a beautiful big house, a nice expensive car (or cars), and many other high quality merchandise, and no money or time to spend on making ourselves happy.

People of vastly different income levels all manage to use up all of their money and many of us go into debt. But worst of all, so many of us don’t even like the jobs we do to support this expensive lifestyle.

Asking Questions Re: Money

A globally optimal choice is one that considers our life as a whole. It starts with how we make our income. Ask yourself, “Do I love my job?” If you do, that’s great.

But if you do not; if you work only for your paycheck; now is perhaps a good time to pause and reconsider our way of life.

How would you like to spend your days? How much money could you make doing what you love? Maybe only half of what you make now. Could you survive on that amount?

Would the happiness you derive from enjoying your job be worth moving into a smaller house, or selling your boat? What about settling for a less expensive car?

Only you know the answer for yourself, I merely suggest that it may be worthwhile to ask these questions.

Maybe you would prefer to stay at home and raise your children, or work part-time to spend more time at home. Would this choice ultimately make you happier, even if it entails making some lifestyle changes?

When you start looking at your life as a whole, and concentrate on what makes you happy, your priorities will be in line and it will become easier to let go of many locally optimal choices in order to increase your overall happiness.

However, even when you love what you do, it is important to strive for globally optimal choices.

Maybe you always wanted to learn to surf, or play the guitar, or see the Great Wall of China. Whatever it may be, you should be using your income in way that will maximize your overall happiness.

In doing this, there will be no sense of deprivation, because you know that if you really want it, you will let yourself have it.

When you ask yourself, “Will having the more expensive tiles in my kitchen make me happier?” and you know that this is a local, and not a global optimum, it becomes easier to go for the affordable choice.

But it isn’t necessarily about saving for the big stuff. Perhaps you would like to be able to go out for dinner more often, or see a show whenever you feel like it, but can’t because your car and mortgage payments drain just about all of your income.

So many of us are “mortgage broke,” working long hours only just to keep up with the monthly payments. I have known some people who could not even afford to furnish the large homes that they worked so hard to own, much less afford family vacations or any entertainment.

Parting Words

Only you know what makes you happy, and only you have the power to affect change in your life. But as we all know, it is not always easy to tell what makes us happy.

It requires a great deal of self-awareness. Perhaps the greatest source of confusion results from social standards, which are all too eager to inform us of what should make us happy (big house, new car, etc).

But the truth is that each one of us is unique, and what makes us happy is as unique as we are. Finding what makes us happy takes a great deal of introspection and may require some trial and error, but it is well worth the effort.

Then one day, a strange thing may happen. You get a job you love … and several years later your income increases. And you look around your house, wondering why you ever bought all of this junk anyway.

You no longer live paycheck to paycheck, because you can’t even come up with more things to buy that will make you happy. Because you already are.