As we embark on the summer vacation season, I'm thinking about the question: Does more spending lead to more happiness?

I just read  Happy Money: The Science of Happier Spending by Professors Elizabeth Dunn and Michael Norton.  The book summarizes the authors' and others' research. What they found is that it's not necessarily how much you make that matters to overall happiness (although that certainly contributes), but what you do with your money. They boiled down the findings to five "key principles of happy money."

1. Buy Experiences. Investing in memories can result in a more sustained level of happiness than buying a bigger house, a more luxurious car, or other material goods. Buying the latest technological gadget might elicit the kind of joy of a child experiences opening a new toy on the holidays, but just like that new toy, the gadget loses its novelty with time--a principle psychologists refer to as "hedonic adaptation." On the other hand, experiences--even those that are fleeting or may initially provoke trepidation, such as hang gliding--create memories that help foster prolonged contentment.

2. Make It a Treat. While you're investing in those experiences, be sure to spread them out so they don't become expectations or habits. In this way, the novelty of each new experience will be fully realized. As the book says, "Abundance is the enemy of appreciation." This is also true with something as simple as a cappuccino. If you make it a daily ritual, it becomes a habit. If you instead substitute your daily coffee once a week with a froth-covered treat, then it becomes a reward to savor.

3. Buy Time. According to Dunn and Norton, individuals should ask themselves the question, "How will this purchase change the way I use my time?" For example, will it allow you to spend more time with your friends or family, or create more "to-dos" to clog your list? Will it free you up to participate in more activities you enjoy? Investing in products or services that allow you to spend time on the things you love will lead to greater overall well-being.

4. Pay Now, Consume Later. Paying for a treat or experience up front, such as event tickets you buy months in advance, allows you to benefit from the extended pleasure of eager anticipation. With all due respect to Tom Petty, the waiting, it seems, may be the best part.  Conversely, credit cards can be a dangerous, albeit convenient, financial tool, facilitating a "consume now, pay later" dynamic. One study cited in Happy Money found that all 30 people surveyed underestimated their monthly credit-card bills by a sizable average of nearly 30%.

5. Invest in Others. Regardless of your circumstances--wealthy or not, young or old--research finds that spending money on others leads to greater happiness than spending on oneself.

The danger zones

While some experts differ on whether higher incomes result in greater levels of happiness, they tend to agree on the following: Increasing debt levels are detrimental to happiness, and keeping up with the Joneses can lead to a general sense of dissatisfaction. Instead, actively managing debt while finding ways to appreciate what you already have on a day-to-day basis may help you make well-thought-out saving and spending choices that support your overall level of well-being.

If you're looking for summer reading material, I heartily recommend Happy Money.  Wishing you happy trails this summer!

Parts of this article were adapted with permission from Broadridge Forefield Investor Communications summary of this book.

A Medicare update law was passed this April.  If you are currently covered by Medicare or will be in the near future, you may be interested in learning more about these changes, including the ones summarized below.

 Social Security numbers on Medicare cards

If you've been frustrated by the identity-theft risk created by Medicare printing your social security number on your Medicare card, you're not alone.  The law fixes the problem, but you'll need to wait until possibly as long as 2023 for the fix to be implemented.

 Currently, Social Security numbers appear on Medicare cards, posing a risk for any individual whose Medicare card is lost or stolen. The legislation authorizes and funds the removal of Social Security numbers from all Medicare cards. For newly issued cards, this must be accomplished by April 16, 2019; existing cards must be reissued no later than four years after that.

Income-related premium adjustments for Medicare Parts B and D

Medicare-recipients with higher incomes pay higher premiums for Part B (medical insurance) and Part D (prescription drug coverage). For most beneficiaries, the government pays about 75% of the premium and the beneficiary pays 25%, but beneficiaries with higher incomes shoulder a higher percentage of the cost, based on modified adjusted gross income (MAGI) reported to the IRS. Beginning in January 2018, new income limits (thresholds) take effect which reduce the income thresholds where the 3 highest premium surcharges apply.  The changes begin at the income level of $133,500 for singles and $267,000 for couples.

*Limits for married couples are twice the limits listed here. Starting in 2020, all income thresholds will be updated (indexed) annually for inflation.

Additional Provisions Include:

• The physician payment cut that has been debated for several years has been permanently repealed, and the law includes annual payment increases for physicians for some Medicare services. This may help ensure that patients will have continued access to their physicians.
• The qualifying individual (QI) program that subsidizes Medicare Part B premiums for beneficiaries who earn 120% to 135% of federal poverty levels is now permanent.
• Funding for the Children's Health Insurance Program (CHIP) is extended. 
• New quality measures for physicians and certain hospital departments have been instituted.
• Medicare Advantage special needs plans (SNPs) have been extended through the end of 2018. These plans may cover extra services in addition to the services covered by all Medicare Advantage plans, and may be available to people with chronic conditions, those who live in a nursing home or require nursing care at home, and those who are eligible for both Medicare and Medicaid.

Parts of this material were adapted with permission for Broadridge Forefield Investor Communications Inc.

How much you choose to contribute toward your children's college education is a personal decision that should be made in coordination with the rest of your financial plan.  Once you've determined the goal, doing your savings tax efficiently can make the money go further.   Here's our perspective on the 3 most common options to consider.

529 plans

A 529 plan is a savings vehicle designed specifically for college that offers federal and state tax benefits if certain conditions are met. Anyone can contribute to a 529 plan, and lifetime contribution limits, which vary by state, are high--typically $300,000 and up.

Contributions to a 529 plan accumulate tax deferred at the federal level, and earnings are tax free if they're used to pay the beneficiary's qualified education expenses. Many states also offer their own 529 plan tax benefits, such as an income tax deduction for contributions and tax-free earnings.  However, if a withdrawal is used for a non-educational expense, the earnings portion is subject to federal income tax and a 10% federal penalty (and possibly state tax).

529 plans offer a unique savings feature: accelerated gifting. Specifically, a lump-sum gift of up to five times the annual gift tax exclusion ($14,000 in 2015) is allowed in a single year per beneficiary, which means that individuals can make a lump-sum gift of up to $70,000 and married couples can gift up to $140,000. No gift tax will be owed if the gift is treated as having been made in equal installments over a five-year period and no other gifts are made to that beneficiary during the five years. This can be a favorable way for grandparents to contribute to their grandchildren's education.

Also, starting in 2015, account owners can change the investment option on their existing 529 account funds twice per year (prior to 2015, the rule was once per year).

Coverdell education savings accounts
 

We don't generally recommend Coverdells because they really don't provide any compelling advantages over 529s and have more restrictions.  

A Coverdell education savings account (ESA) lets you contribute up to $2,000 per year for a child's college expenses if the child (beneficiary) is under age 18 and your modified adjusted gross income in 2015 is less than $220,000 if married filing jointly and less than $110,000 if a single filer.

The federal tax treatment of a Coverdell account is exactly the same as a 529 plan; contributions accumulate tax deferred and earnings are tax free when used to pay the beneficiary's qualified education expenses. And if a withdrawal is used for a non-educational expense, the earnings portion of the withdrawal is subject to income tax and a 10% penalty.


Roth IRAs

Though traditionally used for retirement savings, Roth IRAs are an increasingly favored way for parents to save for college. Contributions can be withdrawn at any time and are always tax free (because contributions to a Roth IRA are made with after-tax dollars). For parents age 59½ and older, a withdrawal of earnings is also tax free if the account has been open for at least five years. For parents younger than 59½, a withdrawal of earnings--typically subject to income tax and a 10% premature distribution penalty tax--is spared the 10% penalty if the withdrawal is used to pay a child's college expenses.

Roth IRAs offer some flexibility over 529 plans and Coverdell ESAs. First, Roth savers won't be penalized for using the money for something other than college. Second, federal and college financial aid formulas do not consider the value of Roth IRAs, or any retirement accounts, when determining financial need. On the flip side, using Roth funds for college means you'll have less available for retirement. To be eligible to contribute up to the annual limit to a Roth IRA, your modified adjusted gross income in 2015 must be less than $183,000 if married filing jointly and less than $116,000 if a single filer (a reduced contribution amount is allowed at incomes slightly above these levels).

And here's another way to use a Roth IRA: If a student is working and has earned income, he or she can open a Roth IRA. Contributions will be available for college costs if needed, yet the funds won't be counted against the student for financial aid purposes.
 

How important are dividends in the S&P 500's total returns?  

In a word, very. Dividend income has represented roughly one-third of the total return on the Standard & Poor's 500 index since 1926.*

 According to S&P, the portion of total return attributable to dividends has ranged from a high of 53% during the 1940s--in other words, more than half that decade's return resulted from dividends--to a low of 14% during the 1990s, when the development and rapid expansion of the Internet meant that investors tended to focus on growth.*

And in individual years, the contribution of dividends can be even more dramatic. In 2011, the index's 2.11% average dividend component represented 100% of its total return, since the index's value actually fell by three-hundredths of a point.** And according to S&P, the dividend component of the total return on the S&P 500 has been far more stable than price changes, which can be affected by speculation and fickle market sentiment.

*Source: "Dividend Investing and a Look Inside the S&P Dow Jones Dividend Indices," Standard & Poor's, September 2013

**Source: www.spindices.com, "S&P 500 Annual Returns" as of 3/13/2015