Money buys us out of misery, poverty, and lowly life. But how does money affect our happiness after our incomes rise?
Psychologists accept a lack of money, like living in abject penury or having an unpayable debt on a credit card, brings both emotional misery and low life evaluation.
Our emotional well-being and life-evaluation do increase with rising income. But there is also a growing class divide in happiness, and poor people became increasingly unhappy between the 1970s and the 2010s.
Don’t forget to find the greatest Money-For-Happiness advice (science-backed) at the end of this article.
Does Money Buy Happiness?
Money can buy happiness. Psychologists link a lack of money, such as poverty or debt, with emotional pain. But more purchasing power due to increasing income does not always result in more happiness. Studies found that more income stops adding to our emotional well-being beyond a threshold. However, life-evaluation keeps rising steadily with rising income.
Your Happiness V/s 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 Click To Tweet
The Invisible ‘Money-Happiness Threshold’
There is a correlation between money and happiness, but there exists a threshold beyond which they stop holding hands. Let’s dive into what the studies discovered:
▪ In a landmark paper in 2010, Daniel Kahneman (Nobel laureate) and Angus Deaton analyzed data from over 450,000 responses from 1,000 Americans for the Gallup-Healthways Well-Being Index. They found that most people were quite happy and satisfied with their lives.
More noticeably, Kahneman and Deaton found emotional well-being, or how people feel on an everyday basis, rises with income. But beyond an annual income of ~$75,000 (($90,000 today), there is no further increase.
While life evaluation, or how people think about their lives overall, rises steadily with rising income.
They wrote, “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.”
▪ However, a 2021 study by Matthew A. Killingsworth found something surprising. In contrast to past research, there was no evidence of a plateau around $75,000.
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.
Also, he found that higher incomes linked with both feeling better moment-to-moment and being more satisfied with life overall.
Matthew Killingsworth’s project “Track Your Happiness” is an app that monitors your happiness levels and finds out what gives you greater joy, as it scientifically investigates what 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.
They say, “Today, money and happiness are more strongly related than they were in the past. It seems money buys more happiness than it used to.”
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: The Science of Happier Spending
Now that we know money can buy happiness, the crucial question is, how can you buy the biggest chunk of happiness for your money’s worth?
How To Buy Happiness With Money
According to research, how people spend their money makes a difference in their overall well-being.
Current 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 psychologist-and-marketer duo Elizabeth Dunn and Michael Norton suggest the following tips on how to use our money for maximum pleasure:
1. Buy experiences rather than material things
Buy experiences rather than material objects.
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) suggested that if you want to be happier, buy life experiences instead of material items.
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.
Moreover, 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.
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). It is far better to spend money on experiences, they profess, such as taking trips, having exotic meals, going to watch a play or concert, or even treating yourself to some chocolate.
Finally, people find talking about material goods is less enjoyable than talking about life experiences (Van Boven, Campbell, & Gilovich, 2010).
And 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.
Now that you know that experiences give you more bang-for-your-bucks, you may set out wishing that you had more money. Instead of a trip to Thailand, you could have bought yourself a World tour, including a 5-day stopover in Greece.When people ask psychologists if money can buy happiness, their science-backed answer is: “It depends on how you spend it.” Click To Tweet
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 in 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 in April 2017 shows that working adults report greater happiness after spending money on a time-saving purchase than on a material purchase.
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 — as house cleaning, home repair, shopping for them — as against 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.
Spending On Experiences For Happiness
As we saw, studies suggest experiencing purchases are more likely to result in happiness than material purchases. So, if you keep buying more experiences, you must 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.
Does Buying of Experiences Always Make You Happy?
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,” said Ryan Howell.
Howell 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. Is it 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 of 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 you must 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 in 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 and 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. Click To Tweet
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.”
When does money stop buying happiness?
As per studies, the money-happiness threshold lies at these income levels:
▪ Researchers Kahneman and Deaton (2010) found that emotional well-being rises with income, but up to $75,000 per year.
▪ Ten years later, researchers Twenge and Cooper (2020) discovered that happiness increases with income, even at $160,000 per year.
What is the best Money-For-Happiness advice, as per science?
▪ While you’re still young, buy some extraordinary experiences, without getting into unpayable debts.
▪ When age mellows you down, indulge more in the ordinary experiences, as they make you feel happy and blessed.
▪ Keep in mind that some of the best things that give you joy are free; you don’t need money to buy them.
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Author Bio: Written and reviewed by Sandip Roy—a medical doctor, psychology writer, and happiness researcher. Founder and Chief Editor of The Happiness Blog. Writes popular science articles on happiness, positive psychology, and related topics.
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