Optimising your spend for happiness

“Show me the incentives and I will show you the outcome”.

This piece of gold is from Charlie Munger. He was Warren Buffett’s right-hand man and one of the wisest humans in recent history.

Today, I am going to show you why incentives are so powerful and how most of your behaviour is driven by other people’s incentives. I will then provide you the information required to create a life optimised for happiness rather than driven by the incentives of others.

72% of people in the UK and US are obese or overweight.

Breaking down Charlie’s wisdom

Charlie is considered one of the greatest investors of all time. He claims he was in the top 5% of people globally to understand the power of incentives and even he thinks he underestimates them.

This would suggest that we’re all underestimating the power of incentives all the time.

Charlie’s quote tells us:

• Incentives drive human behaviour. People tend to act in a way that is beneficial to them according to the incentives they are given.

• Outcomes can be predicted. Understanding the incentives allows us to predict the outcomes.

• Behaviour can be manipulated. Leaders, managers, and policy makers can manipulate behaviour through structuring incentives.

• Unintended consequences. Badly designed incentives can lead to unintended consequences.

Incentives today are all wrong.

How do I know the incentives are wrong?

We can simply look at the outcomes.

The average person today is overweight, lonely, and financially insecure.

72% of people in the UK and the US are obese or overweight.

78% of Americans are living paycheck to paycheck.

Nearly half (49.1%) of people in the UK reported feeling lonely at least occasionally.

These outcomes are a direct result of incentives.

McDonalds and Coca-Cola’s primary objective is to increase sales and maximise profits for shareholders. They do this by selling more unhealthy food and drink.

Facebook and Apple make money through addictive apps and devices. People spend more time on their device than making friends in the real world.

Governments are judged on the growth of the economy. Instead of providing financial literacy classes at school, they are incentivised to make debt cheap and encourage their citizens to spend money they don’t have.

I don’t believe people are inherently bad. I don’t believe they are deliberately causing these alarming outcomes. However, every individual is driven by their own incentives and often those incentives are not aligned to your best interests.

The science of happiness

If you leave your wellbeing up to the incentives of others, you will end up fat, broke, and lonely.

Don’t do this.

Instead, we can use the science of happiness to optimise our wellbeing.

At Make Money Work, we love evidence-based solutions. According to the Happiness Research Institute (yes! There is such a place) to be happy, we need the following building blocks:

• Togetherness: strong social connections and community ties.

• Money: While money alone doesn't buy happiness, financial security does.

• Trust: in others and societal institutions creates a sense of security and community.

• Health: physical and mental health are crucial to happiness.

• Freedom: the freedom to make life choices, whether it's your career, lifestyle, or personal interests, plays a vital role in achieving happiness.

• Kindness: Acts of kindness and generosity have been proven to increase happiness.

Optimise your spend for happiness

The easiest way to change your life is to change the way you spend your money.

By optimising your spend for happiness, not comfort and convenience, you will dramatically increase your wellbeing.

Hint: organisations are incentivised (there it is again) to encourage you to choose the easy option. It preys on your human nature. In the wild, we benefitted from preserving energy but today, it leads to sub-optimal outcomes.

Action: for the next two weeks, analyse your decision before spending any money. Does your purchase enhance or reduce the building blocks of your happiness.

Don’t worry, you won’t need to do this forever.

If you do something often enough, your brain will create neural pathways that allow you to make decisions without conscious thought. By analysing a purchase against the list above, you are telling your brain it is something you want to do in the future. Your brain will then conduct this analysis ‘behind the scenes’. Your only thought will be “I want to spend my money on x”. Where ‘X’ is the option that enhances your wellbeing.

This is why for some, going to the gym is so easy. They don’t debate it, their brain just says, “I want to go to the gym”.

I can’t give you an exhaustive list of purchases that will enhance your wellbeing. Everyone’s life is different, but here are a few suggestions that have had the biggest impact in my life.

Buy a bicycle.

Driving costs money. For the next two weeks, ask if the car is the best way to reach your destination. 9 times of out 10 it isn’t the best option to enhance your wellbeing. In contrast, a bike improves your physical and mental health. It saves you money, increasing your financial security. And, it enhances your freedom as you whizz past those stuck in traffic.

Go to your local Park Run.

It improves your health, both physical and mental. It provides social connection and togetherness. It’s FREE! And you’ll experience lovely acts of kindness as volunteers set up the course and cheer you on.

Go to Lidl once a week.

Doing one big shop a week at a low-cost supermarket requires planning and forethought. However, it saves lots of cash. It ensures my meals are healthy and not driven by temptation while browsing supermarket shelves after a long workday.

Choose what not to buy.

Often more important than what to buy. Before buying anything, compare it to the list above to determine how much happiness it will bring. Usually, the impulse to buy something is driven by marketing (other people’s incentives) rather than improvement to wellbeing. Consciously choose not to buy it and before long the temptation disappears.

What next? 

Over the coming weeks, I will be covering more ways to enhance your wellbeing and reduce your expenditure.

In the meantime, make the effort to analyse your purchases against the happiness list. By taking control of your decisions, and not letting them be controlled by the incentives of others, you can dramatically improve your health, your community ties, and your finances.

It is a happy coincidence that many purchases that are good for you are often good for your wallet too. Think: bikes vs cars. Park runs vs nights out. Family gatherings vs games consoles.

However, a word of warning. Don’t optimise spend for cheapness. The point of money is to provide happiness, not to be hoarded. Spend liberally on things that drive happiness, be ruthlessly frugal on things that don’t. I guarantee you will spend less and be happier.