Chris Budd: How delaying consumption can improve wellbeing

In his latest column for Professional Adviser, Chris Budd discusses how delaying consumption can help improve wellbeing…

One of the more well-known aspects of financial wellbeing is that experiences give greater, and longer lasting, wellbeing than buying stuff. Retail therapy is a myth.

Happy Money (by Elizabeth Dunn and Michael Norton) develops this argument by explaining that there is wellbeing to be had from anticipation. How can financial advisers and planners use this knowledge to increase the wellbeing of their clients?

Expectation and Wellbeing

If holidays create memories, which creates wellbeing, then the excitement of being about to go on holiday also creates wellbeing.

A study in the Netherlands back in 2010 surveyed around 1500 people, some of whom were going on holiday, some were not. Those going on holiday reported greater happiness pre-trip than those who were not, yet both reported the same level of happiness post-trip.

Of course, those who had the holiday will also be able to look at the holiday snaps in years to come as well.

Christmas is another example. The build up to Christmas can be months long and is usually at least a few weeks. And yet the day itself is often over in a flash. It is the anticipation of Christmas, and the excitement of giving and getting presents, that brings so much joy.

Dunn & Norton also refer to people who are thinking about suicide. Their research suggests it is not negative thoughts that brings people to such a point - it is the absence of positive thoughts.

Delayed Consumption Version Present Bias

So how do we use this knowledge to increase our own wellbeing, as well as our clients'? Even though studies will show that a delay increases satisfaction, knowing this does not change the fact that we would still rather have it now. In behavioural psychology this is known as ‘present bias'.

The financial plan itself provides one solution. Why not produce a financial wellbeing plan, which reminds clients what they are saving for. Include a picture, for example. It could be of a house, a holiday, or the grandchildren in Canada.

Another idea is naming your bank accounts and/or investment pots. If the pension fund is instead called the ‘Financial Freedom' account, or the ISA portfolio the ‘Machu Picchu' account, clients are more likely to enjoy the process of saving towards it.

Back To Cash

Paying for something now and enjoying it later separates the negative element of parting with money from the positive experience. This delayed consumption leaves us free to enjoy the trip, conveniently forgetting how much it cost.

Credit cards, however, are the opposite of pleasure from delaying consumption - they encourage consuming now, and paying later. There have been lots of studies that show how credit cards encourage not only more spending, but reckless spending.

In one great study quoted in the book Happy Money, researchers auctioned off baseball tickets to business students; one group had to pay by cash, the other by credit card. The average cash bid was $28, while the average credit card bid was $60.

Another survey asked people to estimate their credit card bill. Every single person underestimated the bill, and by an average of 30%.

In order to increase financial wellbeing, therefore, we should try to pay now and consume later. It is better for budgeting, and it brings wellbeing from delaying consumption.

A Final Thought

I would suggest that clients come to financial advisers and planners specifically so that they do not have to think about their money. It scares them, the responsibility of having to look after those investments. They could easily do it themselves (it is not hard to find a robo-advice offering) and yet they choose to come to you.

And yet what do we talk to clients about? Generally speaking, we talk to them about… their money! My question, therefore, is this: do your clients get wellbeing from the anticipation of their annual meeting with you?

I would suggest your objective with your client's money is to maximise their wellbeing. Money is not something that is only there to generate more money: it is there to generate wellbeing. A focus on this in a meeting will leave clients looking forward to seeing you, which will in itself increase their wellbeing.

Chris Budd is author of The Financial Wellbeing Book and one of the founders of the Initiative for Financial Wellbeing (IFW). He also runs the Eternal Business Consultancy advising on succession planning and the Employee Ownership Trust in particular.

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