Money can buy happiness. Here’s how
Updated: Jun 11
What makes us happy? The question is deceptively simple, and it eludes most attempts at a conclusive answer. Still, work in psychology, neuroscience and economics is improving our collective understanding of the drivers of happiness and the well-being of individuals. There seems to be a dichotomy that divides the pro- and anti-money activists (at least on social media). One side is convinced that money is the root of all evil, while the other is convinced that it is manna from heaven. As with most complex issues, both sides are right. I’ve done some thorough research on the academic literature linking money and happiness. Money does indeed buy happiness, but it buys less than you think. In this article, I’m going to tell you what the scientists think we should do with our money to maximise our happiness.
First off, most studies relating money and happiness use subjective well-being (SWB) as the yardstick. More recent studies, for example by Daniel Kahneman and Angus Deaton (2010), distinguish between two aspects of SWB. These include “emotional well-being” and “life evaluation”. Emotional well-being refers to how we feel on a day-to-day basis, for example stress, happiness, enjoyment, worry and sadness. Life evaluation refers to an assessment of how happy you are with your life, compared with the best possible life you can envision. These two measures of happiness lead to different results, and they should prompt us to ask: do I want to feel happy more often (and stressed less often) or do I want to feel that I live a meaningful life? There is often a trade off between these two objectives.
Hundreds of studies have examined the relationship between money and happiness, and most studies reveal a small but significant positive correlation. In English, this means that there is a statically sound relationship (significant), although the strength of the relationship is small. These studies are quite robust, being confirmed within and across countries. This is not, however, a linear relationship. One Pound will make lower-income earners happier than a high-income earner, for example. In addition, life satisfaction climbs with larger and larger incomes, whereas emotional well-being (feeling more happy emotions and less sad emotions) does not seem to increase beyond $75,000/year (Diener & Biswas‐Diener, 2002; Kahneman & Deaton, 2010; Aknin, et al., 2018).
We consistently overestimate how happy money will make us, and how happy it makes others (Kahneman et al., 2016, Aknin, et al., 2018). If money allows us to do what we want, why doesn’t it increase our happiness in expected proportions. There are two answers, both partly true, to this question.
The first, most popular sentiment is this: things that increase happiness aren’t always for sale (or don’t cost much). This is true in many respects. I love to play football, travel with my wife, and hang out with friends. These things wouldn’t be that much better if I had an infinite pool of money (Dunn, et al., 2011).
The second answer is this: People don’t spend their money right. If they did, they would be much happier than they are currently. I mentioned I like to travel with my wife. If I win the lottery, then, I won’t buy a Ferrari, because I don’t care what car I drive. I may, however, fly first class to Greece and enjoy a luxurious holiday there. Intentional spending, according to this view, is vital to happiness (Dunn, et al., 2011).
These findings are vital to improving your happiness. Most of our purchases, whether we like to admit it or not, are the result of unconscious decisions associated with status, marketing and impulse. We are constantly at war, with adverts in every corner of our lives bombarding us with what we should want and why. We are suckers, we believe it when David Beckham promises his new fragrance will make us feel like a superstar. New iPhone? “It just works! If you don’t get it you’re not one of the real tech experts! You can’t put a price on design!” These messages hack our brains and make promises that we believe. New research suggests that we can change this status quo and shift our money-focus to what makes us really happy.
Mapping out the literature on money and happiness therefore leaves us with a model that looks a bit like this:
Figure 1: The relationship between Well-Being and Money
Source: Author’s own work
While both of these factors have a “money component”, emotional well-being appears to experience flat returns from money after a certain amount (Kahneman & Deaton, 2010). This may be because:
1. Money can’t buy things that improve emotional well-being and
2. People don’t spend money on things that improve emotional well-being
Kahneman and Deaton (2010: 16492) stated that “What the data suggest is that above a certain level of stable income, individuals’ emotional well-being is constrained by other factors in their temperament and life circumstances.”
The pertinent question, therefore, is: How can we improve temperament and/or life circumstances to increase well-being? While it may be difficult or impossible to change a person’s natural temperament, research suggests certain behaviours help in improving positive emotional states. For example, research suggests that one of the most important predictors of happiness is social relationships. Keeping a gratitude journal or focusing on the things that you are grateful for (the ‘counting blessings intervention’) can also help people to experience more positive emotions. Additionally, by focusing on what we already have and have experienced, we reap additional enjoyment from these things and experiences. Savouring what we have in this way is also a powerful emotional tool. Other research indicates that having one’s full attention on the task-at-hand predicts enjoyment of that task. We should keep track of these positive emotional experiences, and frequently check in (mentally at first, then make a note on a phone or in a diary) with ourselves to identify what makes us feel happy.
In addition, we can defend against emotional stress by keeping an emergency fund, creating barriers between work and personal life and noting what makes us unhappy. In this way, it is possible to experience more of what we like and avoid (when doing so is not counter-productive) negative emotional states.
These findings are summarised in figure 2 below.
Figure 2: How to increase Emotional Well-Being
Source: Author’s own work
We have covered what we can do when money fails us. Now, how can we use money to increase our well-being in strategic ways?
The social psychology literature makes numerous findings on the best way to spend our money if we seek to maximise well-being. I will list these findings briefly:
1. Buy Experiences, not things
One study conducted in the USA illustrated that experiences are 23% more likely to generate happiness compared with material purchases. Experiences also appear to produce good feelings long after the event has passed, when they are recalled. While some experiences are always better than others – Sex is better than Commuting – our level of engagement with an activity often determines our enjoyment of it. In other words, “a wandering mind is an unhappy mind” (Dunn, et al., 2011). How do we apply this? If you want a fancy car, consider renting one for a day and taking it to the track, instead of buying it. This way, you get the experience you really wanted while avoiding the ongoing expense. We adapt to things very quickly and soon don’t gain any extra happiness from them. After a few months of ownership, the Honda-driver is as happy on her commute as the Ferrari-driver.
2. Don’t wait for Christmas to spoil yourself
Dunn, et al. (2011) put it eloquently, “Adaptation is a little bit like death: we fear it, fight it, and sometimes forestall it, but in the end, we always lose.”
Adaptaion refers to the human ability to get used to everything. I am writing this in June of 2020. COVID-19 has swept across the world and is increasing at a rapid rate. In fact, we had more cases yesterday than any other day since the pandemic began. And yet, the news and the people I come into (video) contact with, appear less concerned than ever. It’s been 3 months, COVID-19 is the new-normal.
So it is with the things we buy, it doesn’t take long before we grow accustomed to them. Scientists aren’t entirely sure why small frequent pleasures beat large, infrequent ones, but they think adaptation plays a big role. Events that are novel (we’ve never experienced it before), surprising (we didn’t expect it), uncertain (we aren’t sure what the event is or will be) and variable (the experience changes) ward off adaptation effectively. This finding makes sense when we consider that experiences beat things. Experiences change, things stay constant.
Dunn, et al. (2011) put it like this:
“by treating themselves to frequent, fleeting pleasures (rather than more sporadic but prolonged experiences), consumers can capitalize on the burst of delight that accompanies the first minute of massage, the first bite of chocolate cake, and the first sight of the sea.”
Don’t wait for Christmas to spoil yourself. Consider small, spontaneous experiences and surprise your partner, child or friend with a little treat. You’ll be happier for it.
3. Spend money on other people
St Francis of Assisi (a 13th century Italian friar) is credited with a prayer that goes like this:
“…grant that I may not so much seek to be consoled as to console; to be understood as to understand; to be loved as to love. For it is in giving that we receive; it is in pardoning that we are pardoned…”
Research backs this century-old wisdom. One study (Dunn, et al., 2008) examined how spending on oneself and spending on others impacted happiness. The authors found that spending more of one’s income on other people predicted increased happiness. Even more surprising, “participants who were randomly assigned to spend money on others experienced greater happiness than those assigned to spend money on themselves” (Dunn, et al., 2008, p. 1687).
I am not advocating that we all give away all our money and live in a cave. However, after writing this article (and yes for selfish reasons, *looks down in shame*) I am committing to give a portion of my monthly income to a cause I support.
Aknin, L., Hanniball, K. & Wiwad, D., 2018. Buying well-being: Spending behavior and happiness. Social and Personality Psychology Compass, pp. 1-12.
Dunn, E. W., Aknin, L. B. & Norton, M. L., 2008. Spending Money on Others Promotes Happiness. Science, Volume 319, pp. 1687-1688.
Dunn, E. W., Gilbert, D. T. & Wilson, T. D., 2011. If money doesn't make you happy, then you probably aren't spending it right. Journal of Consumer Psychology, 21(2), pp. 115-125.
Kahneman, D. & Deaton, A., 2010. High income improves evaluation of life but not. PNAS, 107(38), p. 16489–16493.