I began summarizing the key principles from Happy Money by Elizabeth Dunn & Michael Norton a while back but then my blogging career came to a grinding halt. My interest in Happy Money was recently reinvigorated when I heard Elizabeth Dunn speak at the XY Planning Network’s annual conference. Hearing her speak about the principles in Happy Money was the catalyst I needed to finish writing about them.
This post is focused on the book’s fourth concept – Pay Now, Consume Later. You can read summaries of the first three principles at the links below. I will address the last concept in a future post (seriously!).
Most of us have it backwards. We impulsively buy now and then pay for it later when our credit card payments come due. This ingrained approach to spending should be flipped on its head according to the research summarized in Happy Money.
The burden of convenience
Buying now and paying later is now easier than ever with ample access to credit and technology that lets us transact with a touch or a tap. The convenience is unquestionable but it comes with a price – detachment from our spending habits.
By using credit, most of us lose track of how much we spend. A study quoted in Happy Money asked thirty participants to estimate their credit card balances before opening their statements. How many of the participants do you think underestimated their balance? I guessed 90% but was wrong. The actual answer is 100%. Every participant underestimated their credit card bill and did so by an average of nearly 30%. Yikes!
Many of these credit card charges are reflexive purchases that add little or nothing to our satisfaction with life. When we add this to the pain associated with opening our statement at the end of the month, it is easy for our spending habits to give us an emotional hangover. We then feel burdened by debt if we don’t pay off our credit cards in full each month.
A better way
Imagine that you scheduled and paid for an upcoming vacation. Two months from now you will trade in your humdrum work routine for a snorkeling trip along the Great Barrier Reef in Australia. You will stay at an all-inclusive resort so all of your food, drinks, and activities are included in the fee you have already paid. Paying in advance benefits you in two ways.
First, delaying gratification by paying now and consuming later provides time for excitement about a purchase to build and for you to enjoy the anticipation. Half of the fun and benefit is the time you will spend thinking about how incredible the experience will be.
Second, paying for the trip up-front frees you from making and worrying about spending decisions while you’re on vacation. You can enjoy your snorkeling excursions and meals without having to think about money. The trip feels free.
Applying the principle
When consumption precedes payment, we are later reminded of the cost of our purchases at a time when the enjoyment of the purchase or experience is a distant memory. On the other hand, paying first and enjoying later gives us time to anticipate the excitement of the future experience and rewards us with the sensation that we’re experiencing something for free.
I encourage you to think of ways to make pay-now, consume-later work for you. Buy tickets to a concert or game in the future. Pay for your next vacation in advance. Save up for a big purchase over time. Utilizing this principle may not only result in happier spending but may also help you spend less.
In my next post, I will explore the final Happy Money concept: Invest in Others.