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Your Spending and Your Financial Well-Being
Business Journal

Your Spending and Your Financial Well-Being

by Tom Rath and Jim Harter

When a team of Harvard researchers surveyed people about their spending on themselves, their spending on others, and their happiness, they found that spending on oneself does not boost well-being. However, spending money on others does -- and it appears to be as important to people's happiness as the total amount of money they make.

We don't get bored with fond memories like we do with tangible objects.

In another experiment, the same investigators studied people who had recently received a large sum of "bonus" money from their organization's profit-sharing program and tracked how each person chose to spend this money. As you might expect, some people spent their money on personal items such as bills, expenses, rent, mortgage, or material goods. Others spent the extra money on something for another person or donated the money to charity. Again, spending money on oneself didn't boost happiness, while spending the money on others did.

In a third experiment, the researchers tracked individuals throughout the course of a single day. Each study participant received an envelope containing either $5 or $20 and was asked to spend all the money by 5:00 that day. Participants were randomly assigned to either spend the money on personal items, to use it to buy a gift for someone else, or to give it to charity. The amount of money the participants were given had no relationship to their levels of happiness at the end of the day. It was how the money was spent that mattered. Once again, the participants who spent the money on a gift for someone else or who gave it to charity experienced a significant boost in well-being by the end of the day, while people who spent the money on themselves did not.

Spending on experiences and memories

When we are feeling down, trying to cheer ourselves up by going on a personal shopping spree is unlikely to help in the long run. Sadness may even lead us to spend a lot more money on ourselves than we otherwise would. People who were shown a video designed to induce sadness offered to pay nearly four times as much for a product when compared with a group that did not watch the video. Despite this major difference, people in the "sadness" group insisted that the video's sad content had not influenced their decision.

Even though we don't realize it, a bad mood could lead to a cascade of poor financial decisions. While spending on ourselves isn't likely to help much, this research suggests that the worst time to make a major purchase is when you are feeling down. We spend the most when we feel the worst. So much for "retail therapy."

Far more effective at increasing our own well-being and the well-being of others is buying experiences such as going out to dinner or taking a vacation. Experiences last while material purchases fade. Even if you feel better immediately after your purchase, studies show that our satisfaction with material goods decreases over time.

But if we use our money to buy pleasant experiences, we get the benefit of looking forward to the event, the actual experience, and in some cases, decades of fond memories. Material items lose their novelty, but we can relive memories indefinitely. Even brief experiential purchases such as dining out or going to a movie increase our well-being. In addition to satisfying our need for social time, we are less likely to regret experiential purchases, which increases our satisfaction with these decisions over time.Wellbeing: The Five Essential Elements

One of the people we interviewed with thriving Financial Well-Being, Susan, is quite frugal in managing her family's money, and she avoids unnecessary purchases. But she and her husband make a point of spending money on fun and memorable experiences such as taking their granddaughter to see a movie. They have also saved money for trips with friends. When we talked with Susan, she and her husband were planning a cruise with another couple. "We've been on vacation with them twice, and we have a really good time together," she said. "So when we told them we were going on a cruise, they said they would go too." When Susan describes the way she spends money, she is mindful about spending on social events instead of focusing on material possessions.

Because spending on experiences boosts our spirits for the long term, it explains part of the connection between money and well-being. For those who make less than $25,000 a year, experiential and material purchases produce similar gains in well-being. However, as income levels increase, experiential purchases produce two to three times the levels of well-being when compared to material purchases.

We don't get bored with fond memories like we do with tangible objects. And we don't second-guess whether we should have made a different decision, as we do with material things. When we purchase meaningful experiences, it buys us memories that continue to grow, and we get more out of every dollar we spend.

The Five Essential Elements of Well-Being

For more than 50 years, Gallup scientists have been exploring the demands of a life well-lived. More recently, in partnership with leading economists, psychologists, and other acclaimed scientists, Gallup has uncovered the common elements of well-being that transcend countries and cultures. This research revealed the universal elements of well-being that differentiate a thriving life from one spent suffering. They represent five broad categories that are essential to most people:

  • Career Well-Being: how you occupy your time -- or simply liking what you do every day
  • Social Well-Being: having strong relationships and love in your life
  • Financial Well-Being: effectively managing your economic life
  • Physical Well-Being: having good health and enough energy to get things done on a daily basis
  • Community Well-Being: the sense of engagement you have with the area where you live


Carter,T.J.,& Gilovich,T.(2010). The relative relativity of material and experiential purchases. Journal of Personality and Social Psychology, 98(1), 146-159.

Dunn, E.W., Aknin, L.B., & Norton, M.I. (2008). Spending money on others promotes happiness. Science, 319(5870), 1687-1688.

Sadness may encourage more extravagance. (2008, February 8). The New York Times. Retrieved September 4, 2009, from

Van Boven, L., & Gilovich, T. (2003). To do or to have? That is the question. Journal of Personality and Social Psychology, 85(6), 1193-1202.


Jim Harter, Ph.D., is Chief Scientist, Workplace for Gallup and bestselling author of Culture Shock, Wellbeing at Work and It's the Manager. Dr. Harter has led more than 1,000 studies of workplace effectiveness. His work has also appeared in many publications, including Harvard Business Review, The New York Times and The Wall Street Journal, and in many prominent academic journals.

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