A financial expert explains how to optimize your budget for more happiness.

“Budgeting” may conjure up images of tightened belts and coupon clipping. For many people, the mere thought of budgeting is cringe-worthy.

Organizing when and how to spend money does not sound fun to me. However, good budgeting can mean spending more money (and time) on what makes us happiest. You read that right: Budgeting does not always mean spending less; it means spending smarter. Implementing a few financial tips and tricks benefits our wallets and can increase our happiness daily.

The four categories of spending

How can budgeting boost happiness? According to the University of Georgia’s Dr. Matt J. Goren, co-host of Nothing Funny about Money, it allows you to focus your financial resources on expenses that improve your quality of life while spending less on things that do not provide so much “bang for their buck.”

Dr. Goren divides expenses into four categories. First, he thinks of them as either fixed (i.e., repeating on a monthly or annual basis) or variable (i.e., coming up unexpectedly). Expenses can also be wants (i.e., the fun stuff) or needs (i.e., the required stuff), which mean different things to different people. Combining these traits gives us fixed wants, fixed needs, and variable wants.

Meeting minimum needs is essential for happiness. This goes for fixed needs—rent and food—and variable needs, such as emergency expenses. When the car breaks down, or you have to get a tooth pulled, suddenly, there is an unexpected—and often very costly—expense. If you have adequately saved, you can avoid this stressful event and its negative emotions. The goal for needs should be to ensure they are covered but try to reduce expenses as much as possible, says Goren.

This principle applies to fixed wants as well. Many people pay a high mortgage to live in a lovely house or pay a hefty car payment to drive a nice car. We think these things are essential for a high quality of life, but we quickly get accustomed to an expensive lifestyle. Once the allure of the big house or nice car wears off, these things do not make us happier daily than we would have been without them. If buying a significant house results in a longer commute to work, we will likely end up less happy despite the increased spending.

The same can be said for other fixed expenses, such as TV and pizza delivery. Once we become accustomed to certain perks, they stop making us happier—yet the expense remains. We are genuinely paying for nothing as far as our happiness is concerned. (And, with the increased strain on our budget, we may be worse off.) This effect is called the “hedonic treadmill”: At first, positive changes, like winning the lottery, make us happier. However, over time, we tend to gravitate toward our happiness baseline.

In contrast, each purchase of a unique variable offers a fresh happiness boost. We can counter the hedonic treadmill effect by prioritizing spending money on more new positive experiences.

The goal is good budgeting in the first three categories to free up more funds for this quality-of-life-boosting variable. The ability to spend money on vacations, gifts, and some material goods can help increase our happiness day-to-day.

Below, we discuss the four expense categories and how to budget for each to boost happiness.

1.   Reduce how much you spend on fixed needs

Maybe you realized that you need a big house because you have a big family. Alternatively, it would be best to have a cell phone because you would be lost. However, how much money you spend on these needs is more flexible than you might realize.

“I have not paid rent since March 2015,” Dr. Goren admitted. “I have saved about $21,000 in the past 18 months on rent alone. I have sought out rent-controlled or vacant apartments, lived with roommates and romantic partners, and—in Athens—I have taken advantage of football game days to Airbnb my house.

My income from roommates and Airbnb has offset my housing expenses.” He is the first to admit that his situation is unique (he does not have children or, seemingly, any worldly possessions), but he is adamant that anyone can follow the underlying principles.

For example, he shows how impactful adding a roommate can be on our finances. Filling that spare room with someone paying $700 a month will generate $8,400 in savings in one year—enough to buy a good used car or pay off a third of the typical college graduate’s student loans.

To reduce spending on fixed needs, start looking for savings opportunities. Here are some other tips to get you started.

●      Sign up for a credit card that gives you 3 percent back on groceries or gas; suddenly, these fixed expenses are reduced by 3 percent.

●      Team up with some friends and join a family plan for your phone; suddenly, your phone payments plummet upwards of 50 percent.

●      Switch to an online savings account like Ally, and suddenly, you get 1 percent interest that you can use for other things.

2.   Try to reduce spending on fixed wants

Knock off cable, the daily latte, and other fixed expenses, and you will free up thousands of dollars every year. True, cutting Netflix out of your life will sting at first. However, you will adjust over time: The hedonic treadmill works the other way around, too. Moreover, your wallet may thank you for about $180 a year.

I asked Dr. Goren to elaborate on how one could eliminate fixed wants. “A few years ago, I got caught up in buying a few gallons of juice every time I went grocery shopping,” he recounts. “One day, I noticed the same flavors in concentrate form—just add water, and you get the same thing. Switching to concentrate saved me an incredible $400 a year.” By discovering that the fancy juice was a want and not a need, Dr. Goren could implement a small change that saved him substantial money in the long term.

Once you change your habits, you will get even more enjoyment from the occasional treat—effectively turning a fixed want into a variable want. But more on that in a moment.

3.   Be strategic about spending on variable needs

To manage variable needs—unavoidable expenses that come up irregularly—it is best to maintain some emergency savings and purchase various forms of insurance. Health insurance is now a legal mandate for all Americans; if you drive, make sure you have auto insurance; if you own a home, have a good homeowner’s policy; and if you have dependents, make sure you have life insurance—a term policy may only cost a couple hundred dollars a year for hundreds of thousands of dollars in coverage.

Having insurance might improve mental health among certain people—and if you do not have insurance when an emergency arises, it could create significant, ongoing financial stress that may limit your happiness for a long time.

To be strategic about spending on variable needs, you could:

●      Understand your insurance coverage through work and fill gaps with your policies.

●      Open a savings account and set up automatic monthly contributions until you have about four to six months’ worth of living expenses saved for emergencies.

●      When you have an unexpected and unpleasant expense, pay it upfront. Every time you have a payment on something that you would instead not be paying for, you get bummed out.

4.   Have more money left over for variable wants

Variable wants are the most efficient at increasing quality of life and happiness. Variable wants, considered an annual expense, are usually much cheaper than fixed wants. Dr. Goren, ever-so-frugal regarding housing, admits that he splurges on other expenses: “This year, I went to Mexico for ten days. The year before, I had been in Canada for ten days. Both those trips cost about the same amount as a year of cable TV.”

You can also try these tricks to get the most out of your spending:

●      Pay upfront for something you will receive overtime. For example, you could buy a season pass to an amusement park or ski resort. Every time you go, you get to enjoy it, but you don’t have to pay again—almost as if it’s free.

●      Spend money on experiences, such as vacations or the occasional fancy date.

●      Spend money on others by planning a fun birthday party or surprise gift.

●      Spend money on meaningful things, like donating to your favorite charity or school. Gifts to friends, family, and charity are particularly good at making us feel happier.

In summary, try to focus your expenses on things that make you happy (new experiences, loved ones, and gifts) and avoid spending on things that do not make you happy (housing costs, car payments, and other fixed expenses). In the long run, you will spend less and enjoy life more.