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Researchers have spent decades examining the big question of whether money buys happiness. Studies from huge international surveys, including interviews with villagers in India and samples of Americans from all walks of life, point to the same conclusion: Money is, indeed, a small but important contributor to happiness. One way you can derive happiness dividends from your dollars is by making sure you spend your discretionary money—even in small amounts—in ways that are more likely to produce a sense of well-being.
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Spend Money on Other People
In a recent Gallup Poll of more than 100,000 people from around the globe, we found that income was closely linked to life satisfaction. Money may not be as an important a factor in personal fulfillment as, say, genetics or social relationships, but finances do affect your well-being. The good news is that this means that money can add to your happiness if you spend it wisely. Research by Elizabeth Dunn, at the University of British Columbia, for instance, shows that spending money—even small amounts—on other people can produce more happiness than a similar amount of money spent on yourself! Even better, you don't have to sell your jewelry or trade in your 401(k) to afford a "pro-social purchase." Participants in Dunn's study reported being happier after spending even $5 on a friend.
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Spend Money on Social Activities
You've heard the old adage "two heads are better than one." This is never truer than when it comes to happiness. One of the most reliable causes of happiness, as it turns out, is other people. In a study comparing the happiest people with the least happy people, we discovered that having quality social relationships was the one factor that distinguished these two groups. It wasn't education or income or gender that set these two groups apart.

The happiest people tended to be those who had someone upon whom they could depend on a time of need or a close confidant with whom they could be honest and open. When you go about the business of spending money, consider bringing a friend along for the ride. Instead of lunching alone, try inviting a friend and see if those dollars do more than just buy a meal; they'll provide an opportunity for connection.
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Spend Money on Experiential Purchases
Research by Leaf Van Boven at the University of Colorado has found that spending money on experiential purchases, such as travel, can pay off with more happiness than material purchases, such as clothing. One possible explanation, according to Van Boven, is that people adapt quickly to new circumstances. Those fancy shoes or great coat might be fun at first, but down the line you get used to them.

Experiences such as golfing, by contrast, can continue to pay out happiness dividends because you can engage in them with friends and reminisce about them later. Perhaps more importantly, experiences (as opposed to material purchases) are resistant to comparison. You likely have an intuitive grasp of how you make mental comparisons when you evaluate life: You contrast your house, your hair and your car with that of your neighbors. While it is easy to see how your Honda Fit stacks up against your neighbor's Lexus, it is less clear how your recent camping trip can be compared to your neighbor's vacation to the Grand Canyon.
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Spend Money on New Activities
You may have noticed that when you take a shower the water that, at first, seems scalding quickly becomes pleasant. This is because you have the power to adapt to temperature. Similarly, humans have a kind of psychological thermostat. Just as the thermostat in your home can be adjusted to heat or cool, you are made to adapt to new circumstances. This natural ability is a gift, and it is what allows you to cope with moving to a new town or settling in to a new job.

Studies have shown that, over time, people can adjust to all sorts of new situations ranging from changes in income to widowhood. What this means, however, is that you can quickly get used to activities: What once felt fresh and exciting can turn into the humdrum of everyday life. When you go to spend your money on recreational activities, try mixing it up by trying new things: Spend $5 on a parking permit at a state forest for hiking, try a new restaurant or give bowling or ice skating a try if it has been awhile since you last did these things. Using your money to pursue novel activities can help you overcome your tendency to adapt and infuse a little happiness back into your life.
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Keep a Full Life Diary
How do you avoid the trap of the "focusing illusion?" One way is to employ a system that helps broaden your attention beyond money, weight, relationship troubles or whatever concerns you. The simplest way to do this is by keeping a "full life diary." Where, in a traditional diary, you write about whatever daily events come to mind, a full life diary includes sections specifically earmarked for health, relationships, meaningful work, enjoyable recreation, spirituality and personal goals. This broader structure will remind you about other areas of your life where you might be experiencing success.

Choose one day a week to review the diary entries in an effort to remind yourself that although you might be struggling in some areas, you are a winner in others! This does not mean, of course, that you turn a blind eye to troubles and setbacks. A full life diary is simply a means of remembering to appreciate what goes well even as it highlights problems.

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Dr. Ed Diener and Robert Biswas-Diener are the authors of Happiness: Unlocking the Mysteries of Psychological Wealth, which won the 2008 PROSE award for best book in psychology. The father-and-son team has published, collectively, nearly 300 scholarly articles on happiness.

Your Happiness Plan