Here are five ways you can use your disposable income to buy happiness.
1. Give it away.
One of the most satisfying ways to spend money is, ironically enough, to spend it on others. A study by the Chicago Booth School of Business found that people who came into a windfall of money reported increased happiness the more they spent that windfall on others. However, if your goal is to maximize your own happiness, the study indicated you should spend that money on a shared experience with someone else rather than a faceless donation.
Another experiment led by Lara Aknin of Simon Fraser University gave Starbucks gift cards to college students. One group had to spend the money on themselves, one group had to give the card away and one was told to treat someone else to a Starbucks coffee – with the stipulation that the student had to spend time with the person they treated. It turns out that this last group – the shared-experience group – reported the greatest happiness of the three.
2. Get peace of mind.
What keeps you up at night? Are you worried about your home being burglarized or your car being stolen? The idea of insurance is that most people spend more on premiums than they receive in payouts. Even though it's a losing proposition, people still buy insurance for one of two reasons: The consequences of not having insurance could be catastrophic, or they want peace of mind. The former reason leads people to purchase property, health or car insurance; but with the latter, you have more discretion.
If you're really worried about burglaries, buy property or rental insurance to assuage your concerns. If you're stressed out about potentially having to cancel a trip, you might consider traveler's insurance (even though it usually isn't a good idea). It may not make financial sense from the insuring-risk perspective, but in this case, you're buying peace of mind.
3. On vacations, spend to minimize stress.
Studies have shown that experiences buy more lasting happiness than material objects, but there's more nuance to it than that. Should you spend $3,000 on an epic trip to Paris, or will you be just as happy spending $300 to go to a local bed and breakfast? Should you try to make the trip as exotic as possible, or stretch it out for as long as possible?
A 2009 study of Dutch vacationers showed that the length of a trip doesn't affect happiness. Instead, the key factor in a lasting good feeling was stress. Those who had a relaxed vacation were much happier following the trip than those who reported stressful or neutral trips.
Spend your money wisely to make the trip as relaxing as possible: hail a cab instead of navigating a new bus system, tip the bellhop rather than hauling your suitcase to your room and budget your trip so that you don't feel the need to pinch pennies. Keep an eye out for signs that you or your family are feeling harried, and spend smart to avoid further stress.
4. Go out for a few nice dinners, not many mediocre ones.
Let's say your monthly restaurant budget is $200 a month. Should you go out for four $50 dinners or one $200 dinner? As it happens, the $200 dinner will bring you more happiness. If you do something often enough that you consider it routine, it loses its luster. Even the largest mansion becomes just a house when you've lived there long enough. Keep your outings as special events, rather than taking them for granted.
Research also shows that anticipating an event often increases happiness more than the event itself. Spend the month leading up to your amazing dinner choosing the restaurant, browsing menus or otherwise preemptively savoring your delicious meal, and you'll get more bang for your buck.
5. Buy time.
The best way money increases happiness is when it buys you time. This can take a number of forms: decreasing your commute by moving closer to work, hiring someone to help around the house or hiring an assistant to clear your plate of the mundane tasks that end up robbing you of precious time. If you have extra income, using it to free up more leisure time can have the most significant impact on your well-being.
Anisha Sekar is the chief consumer advocate at NerdWallet, a personal finance website that provides expert advice on solving marital money problems and more.