If you’re lucky enough to get a bonus…

…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.

5 thoughts on “If you’re lucky enough to get a bonus…

  1. Although we do not get a bonus, typically, my family and I have tried to combine both of these theories. We often will spend money on a ‘thing’ that will give us more experiences–a small pool for the yard that we can invite friends to, a board game that we can all play, a craft project to do together, a mini-van so we can take more family trips.

    Only recently, at the prodding of our 8 year-old have we been adding more experiences, but they are costlier and don’t last as long–going to the local rinks to ice skate, roller skate etc.

    1. @Denise – combining these theories sounds like a good idea. As for experiences… even if they don’t last long, reliving them and anticipating them basically triples the fun. You can stretch them out by planning them together, talking about them coming up, then taking some pictures while there, talking about them afterwards, writing to Grandma about them, looking at the pictures, etc.

  2. From a feng shui perspective, you can combine material spending with experiential spending by spending money on things that will improve your quality of life on a regular basis. Spending money to repair or replace broken things that slow you down or trip you up by frequently malfunctioning removes a recurring source of stress from your daily life. A frequent task like opening and closing the blinds doesn’t have to drag down your mood every time you do it–but it will if the blinds are bent or broken and the cords are so tangled it takes you five minutes instead of five seconds. By the same token, buying something that makes some aspect of your life run more smoothly or more easily on a regular basis adds a recurring source of happiness to your daily life every time you use it and are mindful about noticing and appreciating this. With a Xmas bonus in hand, and New Year’s Eve approaching, you’ll probably have more fun in the short term shopping for party shoes than buying a pair of wellies. On the other hand, you can’t be happy when your feet are cold and wet, and there will be many occasions over the course of the winter to be happy you’ve got waterproof boots. Just as the “before” and “after” savoring gives experiential spending a higher happiness quotient, it’s important to factor in the immediate vs. long-term emotional effects of material purchases.

  3. I got a bonus this year for the first time in many years. It was $400 and I put it right into savings (normally any ‘extra’ cash like this would be spent and split with my hubby). I decided that I could use the $400 during fall 2011 when we plan to go back to Iceland on vacation. It’s our favorite place on earth. I’m glad I saved it instead of spent it. Now I feel as if I have something to look forward to.

    1. @Leah- your decision does seem to go along with the research I’m reading. Planning ahead to spend money on experiences gives us probably the peak boost, because we anticipate the experience for many months. You’re going to look forward to your favorite place on earth for the next 9 months! Talk about buying happiness!

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