…how should you spend it?
It’s a question many people would love to ponder, and if the economy continues to grow, perhaps a few more people will deal with that question this year than last. In theory, bonuses are what economists call windfall payments — those that are not expected. They fall outside your normal budgeting patterns, and so the usual “have to” spending priorities don’t necessarily apply (I say in theory. Some companies have nearly guaranteed bonuses, which are basically part of compensation. In that case, people start incorporating them into their monthly spending patterns).
But here’s the question: if you are lucky enough to get a bonus, how should you spend it to optimize well-being? That is, what would make you most happy?
It’s an interesting dilemma, and I’ve found two studies that hint at some guidelines. One, by Thomas DeLeire and Ariel Kalil, found that at least among older people, only one category of consumption was associated with increased happiness: leisure. Money spent on theater tickets, sports tickets, social activities and the like buys you more happiness than money spent on, say, clothes or cars. This makes sense for a few reasons. Research has definitely found that spending on experiences buys you more happiness than spending on stuff, in part because you savor the event before and after. DeLeire and Kalil also postulate that leisure spending has a strong social component. You don’t go to plays alone, usually, and so leisure spending is also a way of investing in relationships in a way that buying clothes is not.
A second study, from Elizabeth Dunn, Lara Aknin, and Michael Norton, actually looked at windfall spending in two instances. In one, employees received a profit-sharing bonus. The researchers tracked the employees’ happiness prior to the bonus, and after. They discovered that people who spent it on other people (family, friends, or as charitable donations) boosted their happiness more than those who bought themselves something. In another instance, they gave people $5-20 in an envelope and told them they had to spend it by the end of the day. Those who were told to spend it on someone else (again, family, friends, random people or charity) felt happier at 5pm than those who bought themselves something.
As the researchers wrote, “Our work demonstrates that how people choose to spend their money is at least as important as how much money they make.”
What I take from this research is that spending on experiences and people is probably the best thing you can do with a bonus, because it strengthens social connectedness, and relationships are one of our best sources of happiness.
So if you do receive a bonus, and you want to maximize your happiness, use it to throw a party, take your kids to a basketball game, do a volunteer trip with your church, take your family on a cruise or all of the above if it’s big enough. The pay-off will last long into the next year.