It’s the end of the year, and December is the season for giving. The holiday season inspires many to give to charity through a variety of organizations and causes. Because the deadline for receiving a tax deduction for charitable giving is December 31st, many people are also motivated to give at the end of the year to optimize their taxes.

Of course, the new tax bill will reduce the number of taxpayers who itemize their deductions because the standard deduction will be doubled. Charitable donations are an itemized deduction, so many people are motivated especially in 2017 to donate as much as they can to maximize the tax benefits of their charitable contribution.

Switching From a Saving to a Spending (Giving?) Mindset

In a past Forum Mailbag, a reader asked how they can shift their mindset from saving to spending.

Some people have saved their entire lives, and this mentality has become so ingrained into their psyche that even though they have more than “enough” and can afford to spend more, they are unable to do so.

While leaving money to their children and grandchildren is an option, some don’t want to do that for fear of spoiling them and blunting the work ethic and ambition of their heirs.

I’ve suggested that if someone is unwilling to spend their money or leave the money to their grandchildren, then perhaps they should donate money to charity and help others. While charitable donations might seem like a purely altruistic act, recent data shows that spending money on others may actually increase happiness.

The Study

We’ve become wealthier, but not happier

The study comes from the journal Science by Elizabeth Dunn and colleagues from the University of British Columbia and Harvard. In their literature review, they note that while material wealth has grown over the past few decades, happiness has stayed relatively flat.

They attribute this phenomenon to people spending their additional wealth on consumer goods for themselves, which doesn’t significantly increase their happiness. On the other hand, previous studies have found that spending money on others or charitable causes better increases happiness levels.

Dividing spending into personal and prosocial spending

In a preliminary study, the authors surveyed 632 Americans to rate their happiness, as well as outline their budgets. The respondents were asked to divide their spending into bills, expenses, and personal gifts (termed personal spending) versus gifts for others and charitable donations (prosocial spending). On regression analysis, they found that personal spending had no correlation with happiness, while prosocial spending had a slight positive correlation with happiness.

How would you spend a holiday bonus?

Based on this preliminary data, they then conducted an experiment where 16 employees were given a bonus by their company. They found that those who spent more of their bonus on prosocial spending got a greater boost in happiness than those who spent it on personal spending.

Even forced giving makes people happier

For their final experiment, they had participants rate their baseline happiness on the morning of the experiment. The authors then gave each person $5 or $20 to spend by the end of the day. Participants were randomized to either spend it on themselves or on others. They found that those who spent money on others derived a greater happiness boost than those who were instructed to spend it on themselves.

As little as $5 spent on others can increase happiness levels, according to the study.

Takeaways

Spend Money On Others

For the person in our Forum Mailbag post who can’t spend their money, this study suggests that he might consider spending his money on others if he can’t spend it on himself. He clearly has maximized his happiness with his current possessions, so why not give to others — it might improve the well-being of the donor as well as the recipient.

It doesn’t take much to increase happiness

What’s interesting is that the authors were able to induce a detectable increase in happiness with just $5 or $20. It doesn’t take a large gift to improve your happiness. As with other gifts in life, perhaps it really is the thought that counts.

Buy someone a coffee, it might make both of you feel a little better.

This conclusion shouldn’t come as a complete surprise

It shouldn’t be a complete surprise that donating money to others makes you happier. After all, we all feel good when we support a cause that we care about. If giving money to others didn’t make you happier, why would you do it?

Conclusion

Research shows that spending money on others increases happiness more than spending money on yourself. The benefits can be derived for as little as $5 or $20.

So before we ring in the New Year, take a $20 out of your pocket and donate it to a cause that you care about. It just might bring you some holiday cheer.

What do you think of the study? Have you made any charitable donations this year? Do you think the act of giving improves your happiness and well-being?

Poll: Did you spend any of your bonus / tax refund on others?

7 COMMENTS

  1. I have found that giving money or gifts to people that you know or directly interact with, especially if do not expect it, results in the most happiness.

    For example, I was getting an $11 haircut at one of those typical strip mall national chain places and listening to the haircutter talk about the struggles of paying for her son’s college education. I was very happy to give her a $20 tip for the haircut afterwards.

    Similarly, I worked Christmas morning at the hospital a few days ago and on the way, I grabbed a cup of coffee and six $10 Starbucks gift cards for the ancillary staff that would be working with me. They totally did not expect it, especially after receiving a more substantial gift from our group a few days earlier, and I was more than happy to spread a little bit of holiday cheer.

  2. I’m a big fan of the work of Dunn. Her experiments always make sense to my nonPhD brain.

    I just opened a DAF for my family this year. I believe in this literature and others like it so I do plan to spend my way to happiness.

  3. I’m definitely onboard with giving to those close to me, especially when they are genuinely happy and appreciative of the gift. However, I’m less inclined to give to large charities or people who I don’t share a some connection to, I don’t feel that same sense of happiness, and it sometimes feels obligatory the way some fundraisers are setup. I’ve also re-evaluated some of my giving behaviors to some close to me after having the gift-recipients not even offer a simple “thank you” or even acknowledge receipt of the gift! That definitely did nothing for my happiness or well-being.

  4. Just above the five dollar bill you said “themselves” twice. One of those should be “others”. Rather key to the whole post.
    It’s a good topic. I sometimes find it difficult to be charitable for fear of the receiving agent misspending it.

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