07/07/2013 02:32 am ET Updated Sep 05, 2013

Unhappy Spending: Why So Many People Are Broke


"I don't know what love has got to do with happiness
But the times when we were happy
Were the times we never tried...
I'm going to be a happy idiot and struggle for the legal tender"
-Jackson Browne

I live in a world where people are supposed to be happy, but many are miserable.

I work with people who get large amounts of money from an injury settlement or winning the lottery.

Nationwide, the majority of injury victims, lottery winners and professional athletes run through all their money in five years or less.

There is a lot of upside to having money. Economic freedom. There is a point where you have enough money to do what you want, when you want.

A benefit of wealth is usually a long and healthy life. The most effective predictor of how long a person will live and how healthy they will be is how much money they have. Poor people die sooner and have more health issues.

You can look it up.

Thus, why do people who have money blow through it? They are looking for happiness and money didn't do the trick.

I've spent 30 years working with people who get large amounts of money in a short period of time. I've developed a number of techniques to help people cope with sudden wealth and try to get a handle on what is causing them to blow through money quickly.

The must-read new book, Happy Money: The Science of Smarter Spending by Elizabeth Dunn and Michael Norton, gives some clues.

I recently interviewed Norton, an associate professor at the Harvard Business School, and we connected immediately. I liked him, to quote Former Governor Jesse "The Body" Ventura, "because he reminds me of me."

He draws his research from the academic world and mine come from experience and observation, but we came to the same conclusion: We spend way too much time thinking how people acquire money and not enough on how it is spent.

Dunn and Norton focus on what is really important. How can people spend money to make their lives happier?

I've watched lottery winners go through tens of millions of dollars in a year. I saw an injured person go through $600,000 in three weeks, without anything tangible to show for it. He bought a $150,000 trailer and set it on fire when he realized he couldn't afford it. Not only did he go broke, he went to jail for arson.

Those people are extremes, but most that get large amounts of money blow it. If they understand the principles of Happy Money, they may have a chance of stopping themselves.

Dunn and Norton drill down from the arcane world of behavioral economics to make Happy Money a guidebook that average people can follow.

Dunn and Norton break down their advice into five categories:

1. Buy Experiences
2. Make it a Treat
3. Buy Time
4. Pay Now, Consume Later
5. Invest in Others

Buying Experiences

The idea of buying experiences is given a lot of attention in Happy Money. They argue that buying a new house or new car is a huge expenditure that does not dramatically increase happiness. The money would be better spent on a family vacation or something that provides a unique experience.

There is a lot of emotional rewiring to get people to buy into the experience concept. I asked Norton, who does not own a house or car, about my personal situation. I have no emotional attachments to real estate. I bought my current house because I made a good deal on it. That makes me very unusual.

The emotional hurdle for houses and cars is a big one to overcome. Clotaire Rapaille, an expert in consumer behavior who has done consulting work for large automobile companies, noted in his book The Culture Code that 80 percent of all Americans had their first sexual experience in a car. It starts to explain why so many Americans have such a fascination with automobiles.

It also helps to explain why I don't care about having a new car. I'm over six foot tall, spent most of my life over 200 pounds and my first car was a tiny Ford Maverick.

I was lucky to not have the attachment to houses and cars. I never realized substituting houses and cars with experiences is the concept that might keep people from overspending in those categories.

Making It a Treat

Going out to dinner should be a treat. I do it at least 250 times a year. I go to nice places, but don't think about it and really don't appreciate it. One blends into another.

Dunn and Norton suggest that I go less often and make it a planned experience.

My waistline definitely reflects my restaurant affinity. So does my wallet. I spent a year where I tracked every single dime that I spent, down to quarters in parking meters, and compared my spending to national percentage of income. (This is the type of thing I do for fun.)

I am far under in categories like housing and transportation, but my food budget is off the charts. If I go less often, I could make it an experience and still limit myself to nice places.

And also get my weight under control. This is an idea where Dunn and Norton have a convert.

Buy Time

Do we sacrifice our free time to save money? It's a question that Dunn and Norton ask everyone to ask themselves.

I don't own a lawn mower. I don't want even the slightest pretense that I might cut it. Long ago, I decided that I could devote that hour to my financial business and easily pay for a pro.

My late sister was the opposite. She would get up at 3 a.m. to hit shopping center specials and drive across town to save three cents on gasoline. She did it all, but never had much money. Or much happiness. She was too busy working.

Dunn and Norton want us to take every decision, big and small, and put it through the prism of whether there is a way to achieve the task and give ourselves more free time. The Strategic Coach Dan Sullivan has a similar philosophy for how entrepreneurs approach their business.

Maybe they are all on to a key component of happiness.

Pay Now, Consume Later

I was wrapping up the interview with Michael Norton when I hit him with one last question.

"If you had to give one piece of advice to a lottery winner, what would it be?"

Norton answered, "The first thing I would do is tell winners to take the annual payments over a lump sum."

Wow! That is one of the five things that I say in my two books about lottery winners.

I do everything I can to get people to take money over time. I'm a big fan of lifetime annuities and other concepts to make sure people don't blow their money quickly.

Norton approached the idea from the happiness standpoint and not from a financial view. Happy Money discusses how the anticipation of a reward brings more happiness than the actual result reward itself.

For a child, waiting for Santa Claus and wondering what he will leave brings more happiness than the toy that gets used for three days after.

The same concept holds true for adults, too.

Invest in Others

Investing in others is a concept that I understand, but brings me great fear and trepidation. As I note in almost everything I write, billionaires like Warren Buffett and Bill Gates, like Carnegie and Rockefeller in the previous century, derive great pleasure from giving away most of their fortune to make a difference in society.

I encourage my injury victims and lottery winners to "invest in others," but the problem comes in what people they want to invest in.

Many of them attract family and "friends" who are the equivalent of investing in Nigerian chain letters or penny stocks.

I've watched an overwhelming number of people be taken by family and friends. Professional athletes and entertainers are frequently surrounded with a "posse" of hangers on who want part of their fame and a lot of their money. For people like Michael Jackson, it doesn't work out so well.

And it doesn't buy happiness.

Dunn and Norton talk about investing in the lives of others. Some, like the education for children and grandchildren, are obvious. Others are not.

I'm all for investing in others, but putting up screens as to who those others are.

Happy Money is an easy and entertaining read, but a fascinating and potentially life-changing one. If it gets one person one step closer to happiness, it is a success. And it will.

Don McNay is an award winning settlement planner, bestselling author and syndicated financial columnist. He has written Life Lessons from the Lottery and Son of a Son of Gambler: Winners, Losers and What to Do When You Win the Lottery, 80th Birthday Edition.