How Can Money Buy Happiness (Psychology of Happy Money)

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How can your money buy happiness? With any amount of money that you already have? Let’s find out.

Positive psychology says there are two types of happiness: hedonia (the happiness you feel in the present moment) and eudaimonia (the satisfaction you feel when you look back on your life over many years).

• A lack of money may not always degrade hedonia, but it diminishes eudaimonia.
• The latest research finds that both hedonia and eudaimonia increase with rising income.
• Researchers believe that a lack of money, such as that caused by poverty or unpayable credit card debt, leads to a negative attitude toward life (low life evaluation).

When poor and hungry, we suffer greatly, and money helps us overcome the hardships of poverty. But once we get out of poverty, can money buy happiness endlessly?

Let’s explore the evidence from research about how money can buy happiness.

Get the Best Money-For-Happiness Advice in the FAQ section of this post.

Can Money Buy Happiness?

Research suggests that money can buy happiness, but only up to a certain point. Below a certain income level, poverty and financial insecurity can lead to significant stress, anxiety, and depression.

For example, a study by Princeton University found that people with incomes below $75,000 per year reported higher levels of stress and lower levels of happiness than those with incomes above $75,000.

A study by the University of Pennsylvania found that people who were able to increase their incomes by $20,000 per year reported significant increases in their happiness.

As people rise out of poverty and their incomes increase, money can help to improve their quality of life by providing access to basic necessities, education, healthcare, and other opportunities.

Researchers also noted there was also a growing class disparity in happiness in terms of money:

Between the 1970s and the 2010s, the poor became increasingly unhappy (Twenge, Jean & Cooper, A. Bell, 2020).

• Money buys a better life for people who are poor or in debt.
• More spending power does not automatically bring more happiness.
• Bigger salaries improve how we rate life, but they do not continue to make us as happy as we might expect.

Money lets us rise above the hardships of misery, poverty, and obscurity. But beyond a point, it does not boost our happiness.

So, once people have enough money to meet their basic needs and provide for their loved ones, more income does not lead to significant increases in happiness.

In fact, some studies show that people with very high incomes are actually less happy than those with moderate incomes. This may be due to the fact that people with high incomes often have higher stress levels and are more likely to experience social isolation.

Overall, the evidence suggests that money can play a role in happiness, but it is not the only factor.

Okay, do you know how to spend your money when shopping for happiness?

How Can Money Buy Happiness (Psychology of Happy Money)

According to research, how people spend their money makes a difference in their overall well-being.

Data suggests money buys us the most happiness when we spend it to buy experiences, outsource chores to free up our time, and expend it on others.

In a study, that ultimately made it to the book Happy Money: The Science of Happier Spending, the psychologist-and-marketer duo Elizabeth Dunn and Michael Norton suggest the following tips on how to use our money for maximum pleasure:

When we ask psychologists the secret of happy money, their science-backed answer is: “It depends on how you spend it.”

1. Buy experiences rather than material things.

Buy experiences rather than material objects.

• Buying experiences, which scientists call experiential purchases, give us much more happiness both in the short term and in the long term because experiences create pleasant memories.
• Moreover, life experiences boost happiness by fulfilling the psychological desire for connectedness (Howell and Hill, 2009). You are more likely to share your experiences with others in an attempt to boost your social value.
• Furthermore, there is a thing called buyer remorse (a feeling of regret or anxiety after making a purchase) that occurs commonly with materialistic purchases, but rarely with experiential purchases.
• Finally, people find that talking about material goods is less enjoyable than talking about life experiences (Van Boven, Campbell, & Gilovich, 2010).

Van Boven and Gilovich (2003) asked students and adults if life experiences or material possessions made them happy; both groups answered that life experiences made them happier than material possessions.

Nicolao, Irwin, & Goodman (2009) recommended that if you want to be happier, buy life experiences instead of material items.

Buying stuff doesn’t make us too much happier over the long term because we get used to them fast (something that scientists call hedonic adaptation).

Wealthy individuals – whether worth $1 million or $10 million – are not happier as their wealth increases.

— Michael Norton, behavioral psychologist and co-author of Happy Money

It is better to spend money on experiences, such as taking trips, having exotic meals, going to watch a play or concert, or even treating yourself to some chocolate, as these experiences grow happier with time.

Guess what, we have always instinctively known this. San Francisco State University Associate Professor of Psychology, Ryan Howell, says:

“People actually do know, and accurately predict, that life experiences will make them happier.”

These experiential purchases become more valuable with time—as we recount them as stories or memories.

Moreover, any spending that leads to an increase in social interaction—the most valuable predictor of people’s happiness—makes us feel more connected to others.

2. Buy time for yourself to enjoy things you love.

Buy time for yourself to enjoy things you love. Things that can make you unhappy are those that take a lot of your energy and time, like spending 4 hours on a layover to save a hundred bucks. But you can easily outsource them and have that time to do things you actually love to do.

Research published in PNAS shows that working adults report greater happiness after spending money on a time-saving purchase than on a material purchase (Buying time promotes happiness, Whillans & Dunn, 2017).

That is, when you use the money to buy time for yourself, then you relieve yourself of the pressures of working in a time-pressured environment.

The study involved 6200 people from the US, Canada, Denmark, and the Netherlands. The researchers found people were happier when they spent money buying services — such as house cleaning, home repair, and shopping for them — than buying material things.

So, the advice is to spend money to outsource time-consuming services, so you could have more time to engage in activities you enjoy.

The survey showed people are better off outsourcing time-consuming services using their money. One of the researchers, Prof. Ashley Whillans of Harvard Business School, says,

“Our results suggest that buying time has similar benefits for happiness as having more money.”

3. Spend on others rather than always on yourself.

Spend money on others rather than always on yourself. Invest in others and pay it forward. Studies show giving away some of your money makes you happier than always spending it on yourself.

4. Make it a joyful treat.

Make it a treat. For example, if you have a latte every day, it is no longer a treat. But if you only have it on Tuesdays, it becomes a treat.

Michael Norton recounts,

“In one experiment of ours, some people were assigned to eat chocolate every day for a week; others were asked to abstain from chocolate. When they came back a week later, we gave them more chocolate to eat. Nobody hated the chocolate — it was chocolate, after all — but those who had given it up for the week enjoyed the chocolate much more than those who’d been allowed to eat chocolate the whole time.”

So, take breaks from doing your favorite activity. When you return to it after some time, it becomes more enjoyable.

5. Pay now, but use later.

Pay now, consume later. The authors say you buy an experience now, but use it later. Like, pay now to book a vacation that you can go on in three months’ time.

This creates positive expectations. The French term Se Rejouir explains it well: getting pleasure now from something that will happen in the future.

Is There An Income Threshold For Happiness?

Yes. Many people, including scientists, believe that after a certain point, increased income does not correlate with increased well-being. This a called the “income threshold for happiness,” beyond which money has no effect on happiness.

According to Kahneman & Deaton (2010), that threshold is $75,000 ($90,000 today) per year. However, Killingsworth (2021) did not find a threshold even at an annual income of $80,000. Twenge & Cooper (2021) also did not notice a threshold at $160,000 per year.

▪ In a 2010 landmark paper, Nobel laureate Daniel Kahneman along with his long-time research associate Angus Deaton analyzed data from over 450,000 responses from 1,000 Americans for the Gallup-Healthways Well-Being Index.

They found that the majority of the respondents were happy and satisfied with their lives.

More noticeably, Kahneman and Deaton found that emotional well-being, or how people feel on an everyday basis, increased with income.

But beyond an annual income of ~$75,000, there was no further increase.

All the while, life evaluation, or how people think about their lives overall, rose steadily with rising income.

“Beyond ~$75,000 in the contemporary United States, however, higher income is neither the road to experience happiness nor the road to the relief of unhappiness or stress, although higher income continues to improve individuals’ life evaluations.”

— Kahneman and Deaton, 2010

▪ However, a recent study by Matthew A. Killingsworth found something surprising. In contrast to past research, there was no evidence of a plateau of around $75,000 (Experienced well-being rises with income, even above $75,000 per year, Killingsworth, 2021).

In the study, people reported increasingly experiencing well-being beyond that income range. It showed happiness increases in direct proportion to a rise in income (logarithmic) and continues to rise beyond the $80,000/year mark.

Furthermore, he found that higher incomes were linked with both feeling better moment-to-moment and being more satisfied with life overall.

“The importance of money on its own was virtually unrelated to experienced well-being, so it was not better or worse overall to think money was important; instead, low earners were happier if they thought money was unimportant and high earners were happier if they thought money was important.”

— Matthew A. Killingsworth

Matthew Killingsworth’s project “Track Your Happiness” monitors happiness levels and finds out what gives a person greater joy and makes life worth living.

▪ And this 2020 research by Jean Twenge and Bell Cooper, on 40,000 U.S. adults aged 30 and up, found happiness increases with income showing no signs of tapering off even at $160,000 per year.

Twenge and Cooper’s study also showed there is a growing class divide in happiness. While the happiness of low-SES (Socio-Economic Status) White adults declined, the high-SES Black adults became happier, from 1972 to 2016, in the US.

“Today, money and happiness are more strongly related than they were in the past. It seems money buys more happiness than it used to.”

— Twenge & Cooper

Does More Money Give More Control Over Your Life?

Higher incomes appear to give people more control over their lives. In a study published in PNAS titled “(Experienced well-being rises with income, even above $75,000 per year, Killingsworth, 2021),” Killingsworth discovered that the majority of persons polled believed that their income was related to their level of control over their lives.

He asked people, “To what extent do you feel in control of your life?”

Killingsworth found that 74% of the participants connected their income and experienced well-being with a sense of control over their life.

He also assessed their financial insecurity by asking, “Did you have trouble coping with regular bills during the last 15 days?”

He found there was a 38% correlation between income and experienced well-being among those who responded to that question.

Killingsworth also asked, “To what extent is money important to you?” and found:

• Low-income people were happier if they thought money was not important, and
• High-income people were happier if they thought money was important.

You act like mortals in all that you fear, and like immortals in all that you desire.

— Seneca The Younger, Stoic Philosopher

Does Your Personal Happiness Link To Your Country’s Happiness?

In 1974 Richard Easterlin famously pitched that increasing average incomes does not raise average well-being, a claim known as the Easterlin Paradox or the happiness-income paradox.

The paradox says happiness changes directly with income, but over time, happiness does not increase when a country’s income increases.

A 2010 study validated Easterlin’s theory. It found that happiness and income were positively related in countries ranging from poor to rich, in the short term.

But over the long term, usually 10 years or more, happiness does not increase as income goes up.

In the short term, happiness falls when the economy shrinks, and rises when it expands. Over the long term, happiness remains unrelated to the size of a country’s economy.

— Easterlin’s Paradox

Does Buying Experiences Always Make You Happy?

As we saw, studies suggest experiential purchases are more likely to result in happiness than material purchases. So, if you keep buying more experiences, would you keep getting happier and happier? Not necessarily so.

Carter and Gilovich (2012) showed that when asked to narrate their life story, people were more likely to bring up their experiential purchases rather than material purchases.

Research says how happy or unhappy you are with your purchases depends greatly on your attitude.

Jia Wei Zhang, a student of Personality Psychology at UC Berkeley, California, and Dr. Ryan T. Howell, an Associate Professor of Psychology at San Francisco State University, came out with an important paper in the Journal of Research in Personality.

Their three studies found that material buyers, unlike experiential buyers, report equal levels of happiness from material and experiential purchases.

“Everyone has been told if you spend your money on life experiences, it will make you happier, but we found that is not always the case.”

— Ryan T. Howell, Ph.D. assistant professor of psychology at San Francisco State University and co-founder of the website Beyond Purchase.

Howell aims to better understand the role of finances and consumption in people’s happiness and subjective well-being, as well as the concept of happiness and quality of life in general. He asks,

“Have you ever spent money on something that didn’t make you as happy as you thought it would? If so, you’re not alone. Would it be possible to become happier by changing your spending habits?”

The researchers found material buyers are not much happier when they purchase an experience—because that purchase is outside the comfort zone of their personality type and values. So, would they be happier if they were to buy something equal to money?

No, again. They are not better off, either because they perceive others might criticize or look down upon their choices. According to this study, we find that neither life experiences nor material items make materialistic shoppers happier.

Jia Wei Zhang says,

The results show it is not correct to say to everyone, “If you spend money on life experiences you’ll be happier,” because you need to take into account the values of the buyer.

So, if you are the type who likes to spend money to gain material possessions but feel empty because you bought those, then changing your buying habit to buy experiences will not make you any happier.

You will still feel equally empty as soon as the novelty of your new purchase wears off.

It is the buying tendencies, not values, that moderate the experiential advantage.

Do Special Experiences Buy You More Happiness?

If you’re indulging in special experiences, then would you get more happiness in proportion? Not exactly. It depends on your age, to be more precise.

A paper for The Journal of Consumer Research by Amit Bhattacharjee and Cassie Mogilner dives into this question of types of experience and happiness. They show us happy people are less keen on special experiences than they are on ordinary ones.

In their Happiness from Ordinary and Extraordinary Experiences, Amit and Cassie argue that a person’s age helps to determine their overall level of happiness.

With passing age, people are more likely to appreciate ordinary experiences. In contrast, as their younger selves in the past, they had sought extraordinary experiences to fill their lives with happiness and meaning.

There was a general agreement on the differentiation between the two types of experiences.

While conducting eight different surveys, the researchers consistently found that people could comfortably distinguish between the two categories — ordinary and extraordinary — when judging themselves, as well as while evaluating others.

A few examples of ordinary behavior:

• A morning hug from your child
• Cooking a meal together with your spouse
• A lucky penny on your wayside

Some examples of extraordinary behavior:

• Conquering a mountain peak
• Getting married; having a child
• Going for a cross-country balloon ride

Bhattacharjee and Mogilner write, “Younger people with ample time remaining tend to pursue goals that will prepare them for the future, while older people with limited time left tend to pursue goals that are emotionally satisfying in the present.”

The study cites the 2007 movie The Bucket List in its introduction. But it also reminds us that checking items off the items on our bucket lists may be more important for our happiness when we’re young. When we’re older, we may get just as much joy checking something off our daily to-do list.

The extraordinary experiences give us a feeling of awe. Awe is an intriguing yet powerful experience. You feel it when you stand before a grand spectacle, fascinated by its extraordinary beauty.

Awe is also associated with the concept of infinity. Economists define awe as a feeling of surprise and admiration. Awe is the feeling we get when we rise above the ordinary and peer at the vast expanse of life around us.

With passing age, people are more likely to appreciate ordinary experiences.

FAQs

Final Words

Michael Norton offers us this invaluable piece of money wisdom:

“While it’s true that having more money doesn’t usually make us less happy, it’s also true that simply having more money doesn’t guarantee happiness. We suggest that people should stop thinking exclusively about how to get more money, and instead focus more on whether they are getting the most happiness out of the money they already have.”

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√ Also Read: The Habits of Financially Happy People

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