Why Money Really Can Buy Happiness

Rethinking your budget and attitude toward money can create a fuller, more enjoyable life.

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They say money can't buy happiness, but Laura Vanderkam, author of All the Money in the World: What the Happiest People Know About Getting and Spending, begs to differ. In her new book, she explains how rethinking your budget and your attitude toward money can create a fuller, more enjoyable life. Excerpts from Vanderkam's interview with U.S. News:

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What inspired you to write All the Money in the World ?

It came out of my last book, 168 Hours, which is about how people spend their time. Time and money are two closely related variables that tend to move in opposite directions. Optimizing both of them is a tricky undertaking. Time is more absolutely limited, whereas money is a lot more variable.

People have been thinking about money and the economy a lot in the last few years. We're clawing out of a pretty deep recession, and I think there's a desire to be a little bit more mindful of our money. Even as we crawl back out of that, how can we take the lessons we learned from that time and keep them even during better times?

One of the concepts that you mentioned in the book and on your blog is the idea of the "joy budget." Can you tell us more about that?

Budgeting is a pretty dreary idea if you think about it. One of the reasons thinking about money is so dreary is because people don't budget for joy. They don't think about what they'd like to spend their money on, and they also assume that we have to spend certain percentages on various necessities.

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Those budget calculators you find everywhere say you should spend a third of your income on housing. Okay, you can, but if you make a decent amount of money, you could also spend a lot less and still have a pretty good place to live, then budget a lot more money for other things like travel or going out with friends or holding parties.

So, looking at the money you have going out, and thinking about how you feel about all of that and figuring out if there is a way over time to spend a higher percentage of that on things that do make life more enjoyable for you and the people you care about without cutting back on long-term financial security. If there are ways to spend less on things you don't care about, you can spend more on things you do.

Any tips for someone trying to figure out what will bring them greater happiness?

There's a little exercise I have in the book. I call it "the $10,000 question." Let's say you got a completely unexpected inheritance of $50,000, and being a responsible person, you put $40,000 toward retiring any debts you have or to savings or any usual charitable commitments you have. Ten thousand is going to be fun money. What would you spend it on? You want to look back at your life years from now and think that what you spent it on was memorable. So what would that be? It starts getting you thinking about what you might enjoy, and so you can start thinking about ways to bring elements of that into your life now.

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In exploring money and happiness, what surprised you most?

Spending money on other people turns out to be correlated with happiness, which I think would not necessarily be intuitive. You would think that buying a DVD for yourself would make you happier than buying it for someone else, but that's not actually true, because humans are social creatures and giving things to other people is one of the most natural ways that we have of establishing bonds.

So I learned looking at the research that spending money on other people, gifts, and charity is correlated with happiness. Another thing is spending on your social network. So spending on getting together with friends, spending on experiences—things like travel. All of those are ways to buy happiness, whereas spending money on things you get used to or that consume a large percentage of your budget because they're easily compared with other people is perhaps not the wisest course of action.