Spend your money while you're still young—you'll be happier

All things elderly.
Sept. 11 2008 5:22 PM

Spend It While You Can

Turns out money can buy you happiness. But it buys more happiness when you're young.

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Senior citizens shopping. Click image to expand.

We're frequently told, by news-you-can-use segments and bank ads hawking savings accounts, that Americans are not saving enough for their retirements. Yet just as often we're reminded that, given the fleeting nature of human existence, we should eat, drink, and be merry while we still can. Thriftiness is making a comeback in the wake of our latest speculative bubble, but some new evidence may help to tip the scales back in favor of the carpe diem approach to life. It turns out that money can buy you happiness—but young people get a lot more happiness out of their dollars than old people do.

Recent research by economists Amy Finkelstein, Erzo Luttmer, and Matthew Notowidigdo suggests that you'll get a bigger bang for your consumer buck by spending while you're healthy, before old age starts to take the fun out of life's indulgences. Their research is part of a larger academic enterprise attempting to understand what makes us happy. Economics is a field more associated with rational calculation than emotion, but there's an ever-growing subculture of "happiness economists." Just as mainstream economists spend their time figuring out things like gross national product—how much a country produces in dollar terms—these happiness scholars churn out numbers like gross national happiness (how much happiness a country produces).


It's relatively easy to measure things like corporate profits and trade flows. Measuring a person's psychic well-being is trickier, though happiness economists take a relatively straightforward approach: For the most part, they just ask people if they're happy. They then try to figure out what makes people say yes or no. Perhaps not surprisingly, money-obsessed economists have been fixated on whether higher incomes make us happier. And after much debate, their conclusion is that money does indeed buy happiness. Or, as an economist would put it, there's a positive marginal utility of consumption. People in rich countries say they're happier than people in poor countries, and in just about every nation, the well-to-do report being happier than their impoverished counterparts.

Of course, an extra dollar may not bring the same joy to all people. For some, happiness is only as far away as the next swipe of their Amex; for others, there's pleasure to be had in having nothing at all. It's also true that what makes us happy today might not do the trick tomorrow—the money-happiness connection may change throughout a person's lifetime.

How does ill health affect this relationship? Healthy people are happier than sick ones. That's obvious. But once you're sick, does money buy you more happiness or less? On the one hand, you can't enjoy your new Mustang convertible if you're laid up in the hospital. On the other hand, money can buy a lot of comforts for those suffering from debilitating illness (a full-time housekeeper; a nice, soft La-Z-Boy).

Finkelstein and her co-authors use the "Health and Retirement Survey," which follows a sample of retired persons, asking them questions about, among other things, income, health, and whether they agree with the statement "Much of the time I was happy during the past week." The study allowed the researchers to determine whether rich retirees say they're happier than poor retirees. And since the survey goes back to the same participants year after year, it's also possible to track a single person's happiness over time to see how it's affected by health.

The authors find that healthy retirees are a pretty contented lot—only 13 percent of respondents reported not being happy. The rich are happier—going from an annual income of $25,000 to $50,000 reduces the likelihood of saying you're unhappy by nearly five percentage points. But that's only if the respondents are healthy. The extra money has a much smaller effect on happiness for the sick and infirm—the authors calculate that the happiness effect of higher income is only about one-quarter as much for respondents with multiple chronic diseases. So, having a lot of money to throw around once you're retired is great … but only while you're healthy enough to spend it.

The researchers' findings reinforce claims that economists have made elsewhere that Americans aren't really undersaving all that much for their golden years. As Tim Harford has noted in Slate, since when you're retired it's possible to spend more time lining up for early bird dinners and clipping coupons, you don't need as much money to get by on. And if money isn't going to bring you as much happiness in your old age, that's further reason not to oversave. If you've always wanted to samba till dawn in Rio or see Angkor Wat at sunrise, do it now, when you're healthy and you know you'll still enjoy it.

The authors also have a surprising suggestion regarding health insurance: We'd actually be better off if insurance companies reduced the portion of medical expenditures they pay for. Your monthly insurance payments would end up costing you less, and while you'd shell out more for hospital stays and other medical expenses if illness struck, well, at that point you wouldn't be healthy enough to enjoy spending the extra cash anyway.

The authors' findings should be a wake-up call to those already in the midst of their golden years who still have their health but face increasingly unfavorable odds of staying that way. You really should treat yourself to that dinner at Chez Panisse you've been putting off for a special occasion. And what if you're young and fit? The odds of living to see another healthy day are stacked in your favor, but who knows what could happen tomorrow? It's not every day an economics paper gives you an excuse to spend your money and live life to the fullest. I'd say seize the moment.



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