This guest blog was written by Chris Budd who wrote the original Financial Wellbeing Book, and also the Four Cornerstones of Financial Wellbeing. He founded the Institute for Financial Wellbeing, and has written more than 100 episodes of the Financial Wellbeing Podcast.

One would imagine that the way we spend money makes us happy. However, this is not always the case. Understanding why our spending habits are often bad for our long-term wellbeing can help us to make better financial decisions.

Set point theory

Over the centuries, there has been a huge amount of research and philosophising over the sources of short-term happiness and long-term wellbeing. One idea, known as “set point theory”, suggests that we each have a certain level of happiness, and that we tend to return to that level, irrespective of life events.

One often-quoted study showed that people who experienced a major life-changing event – such as winning the lottery or losing of limb – returned to the same levels of long-term wellbeing that they had before the event.

This leads to two questions: firstly, how did we arrive at our own individual set point; and secondly, is there anything we can do to increase it?

Hedonic treadmill

When we have an experience that creates either positive or negative stimulation, this produces a gain or a loss in our short-term happiness. As the stimulus reduces and then disappears, our wellbeing stabilises. This is known as the “hedonic treadmill”.

A layman’s term might be “getting used to things”. Events, whether they create positive or negative stimuli, cease to have an effect as they become the new normal.

According to research, our own unique long-term level of wellbeing is determined by:

• 50% inherited
• 10% from our circumstances
• 40% from our intentional activity.

By the time you are reading this, your personal set point will have already been established – and it is unlikely to change without intervention.

How to change your set point

We tend to focus on our circumstances, thinking that this is what will make a difference to our wellbeing. You might prioritise buying something nice or living in a bigger house. In fact, this is likely to have only a short-term effect on happiness, and only contributes a small amount to our long-term wellbeing.

We need to look at what long-term changes we can make to increase our set point of wellbeing.

Let us look at some actions we can take to make long-term changes to our wellbeing – and increase our personal set point.

Construct permanent reminders of what makes you happy

One way to improve our long-term level of wellbeing is to put in place mechanisms to remind us of the things that make us happy. If the impact of positive life changes and events declines over time, then reminding ourselves of that change will extend that impact.

One word for this is mindfulness. Taking time to stop and notice the good things in life, and appreciate what we have. If this sounds ridiculously easy to do – it is! And yet it is something we need to work at to make it a very positive habit.

Spend for wellbeing

Understanding that our spending is, at least in part, driven by the need for short-term hits of happiness means that we can change our habits, and start spending for wellbeing.

For example, instead of buying stuff that we don’t really need, spend that money on experiences. Having a joyful experience creates memories, which will have a much longer-lasting impact on wellbeing.

The quality of our social relationships is one of the biggest contributors to wellbeing. So, having experiences with a loved one will increase their impact. You could take this a step further by purchasing tickets for events as birthday and Christmas presents.

Acceptance

Another downside of using our spending to provide those short-term hits of wellbeing is increasing aspiration. The fact that the positive stimuli are short-lived can lead to us continually increasing our spending to increase the impact.

The name for this tendency is “income creep”. We spend more as our income increases, and yet our wellbeing doesn’t change. Greater awareness of these aspects of financial wellbeing can help.

Automation

Automation is one of our greatest allies in improving our spending habits. For example, setting up regular payments into savings and pensions takes away the temptation to buy that short-term hit of happiness.

Automation isn’t just about spending. Having a clear path to identifiable objectives is a key to long-term financial wellbeing. Having a regular (such as annual) meeting with your financial adviser to review your financial plan, and thereby check progress, is a great way of reminding yourself of how your spending and saving is helping you towards your chosen future.

Please note: This blog is for general information only and does not constitute financial advice, which should be based on your individual circumstances. The information is aimed at retail clients only.