The ultimate guide to money and happiness: it’s simple

Posted by on 19 August 2018 in Psychology & Mindset

In my very first article I told a story about partners at my consulting firm that worked well into old age. They earned lots of money but didn’t seem that happy.

These partners worked long hours to climb the corporate ladder. And they spend their high incomes on big houses, nice cars, and fancy restaurants.

I had a hunch that this wasn’t the correct path to a happy and fulfilling life. But I didn’t have any proof. So I dived head first into the scientific research on happiness to figure out how we should spend our money.

What I found amazed me in it’s simplicity.  All the happiness research pointed to one thing: we should spend our money on building close and loving relationships.

And I realised that being mindful with how we spend money allows us to build those close relationships and, at the same time, helps us reach early retirement faster.

What does the research tell us?

Increasing our salary does make us happier …to a point

Imagine three people. They are all males, 35 years old and live in San Francisco. One person earns a salary of $45,000 per year, another earns $95,000 per year, and the last makes $225,000 per year. Who do you think is happiest?

As you would imagine, the man who earns $45,000 is the least happy. But surprisingly, the man who earns $225,000 is no happier than the man who earns $95,000 per year.

According to a huge study of 1.7 million people published in the journal Nature, higher incomes stop making people happier at about $75,000 per year. This is consistent with previous studies by Nobel Prize winning psychologist Daniel Kahneman.

A chart showing that happiness increases with income up to $75,000. Any further increases in income reduce happiness slightly.

Income does not increase happiness above $75,000

The study also found that, as far as happiness is concerned, it may be possible to earn too much money.  Look closely at the chart above. You’ll see that over $75,000 the line dips back downward, which indicated that income is increasing but happiness is declining.

Why do we stop getting happier?

According to the researchers, a reasonable income helps us satisfy our basic needs, such as purchasing food and paying bills. But after those needs are met, we tend to spend money on things that don’t make us happier. They believe there are two reasons for that:

Firstly, we start making social comparisons that ultimately make us less happy. Imagine a really nice watch. It has a beautiful hand designed face, runs on a Swiss time piece, and is set in beautiful sterling silver. You’ve wanted this watch for such a long time and you’ve finally made the purchase. You feel really good walking around with it and you glance at other people’s watches that look terrible in comparison.

Then one day you run into somebody with an even more expensive watch. And now you’ve seen that watch, yours doesn’t seem quite so good. In fact, you wished you spent more money and bought the nicer watch. It’s a little embarrassing walking around with your average looking watch. Yuck.

Unfortunately, these types of social comparisons are very difficult to avoid. And finding somebody with a better watch immediately makes you feel less happy with your watch. And there’s always going to be somebody with a nicer watch (or a bigger house or a newer car).

Secondly, any boost in happiness is temporary because we adapt to our new circumstances. After we purchase something, we get an immediate boost in happiness. For instance, I remember buying my car and driving home feeling absolutely amazing. It was new, clean and for some reason the speakers just sounded so crisp!

But after a few months, that wonderful feeling started to wear off. Don’t get me wrong, I still like my car — but it doesn’t give me that intense feeling of happiness anymore.

“One of the enemies of happiness is adaptation. We buy things to make us happy, and we succeed. But only for a while. New things are exciting to us at first, but then we adapt to them.”

Dr. Thomas Gilovich, Cornell University

Humans are really good at adapting to new circumstances. In the case of happiness, this means that after our temporary boost in happiness, we regress back down to our baseline level.  And our baseline level of happiness is the same as never having bought the item in the first place. Psychologists call this concept hedonic adaption.

But if we do have more money, what should we spend it on?

For those of us fortunate enough to earn more than $75,000, this doesn’t mean that any additional spending won’t bring us happiness.

Most people spend their excess money on material things that don’t make us happier. But if we spend our money more mindfully, then we can use our money for things matter.

The research tells us that there are three main ways we can spend money to bring us happiness:

Experiences

Most of us assume that because a new car lasts longer than a trip to Europe, then the new car will keep us happier for longer.

But ironically, our Europe trip will make us much happier than our new car.

One study asked people to report how happy their were after a major material purchase (e.g. a car) and a major experience (e.g. a holiday). The researchers found that the initial happiness was the same for material purchases and experiences. But over time, happiness with material purchases went down, whereas happiness with experiences went up.

The researchers argue that because we see our new car every day, we more quickly and easily adapt to it. And we quickly loose that buzz of happiness.

But, experiences become part of our identity. Our trip to Europe is associated with many great memories, we learnt a bunch of new things, and we gained a new perspective on life. That’s the kind of happiness that lasts a long time.

A chart showing that happiness from spending on experiences and material goods is about the same at time of purchase. However, weeks later happiness from spending on experiences has increased but happiness from spending on material goods has decreased.

Happiness from spending on experiences increases over time

Indeed, one of the reasons that experiences make us happier is that they readily connect us with other people. Experiences are rarely experienced alone. And they are also experienced time and time again through conversation, storytelling and yes… even Facebook.

“Turns out people don’t like hearing about other people’s possessions very much, but they do like hearing about that time you saw a great band.”

Amit Kumar, Cornell University

And when you meet somebody who has experienced the same thing as you — for example, you both road-tripped through Europe — you don’t compare your trip with theirs and feel envious. Instead, you bond over your shared experience. It brings you closer together.

Time

We are fortunate to live in societies where incomes have rising high enough to lift us out of poverty. But believe it or not, this may have introduced a new type of poverty: time poverty.

People with higher incomes report that they have less time than those with lower incomes. According to researchers from Harvard University, this feeling of time poverty leads to less happiness, more anxiety, and poorer sleep.

Because of this, the researchers supposed that using income to purchase more time — such as paying somebody to do your household chores — should improve things like happiness.

The researchers asked over 2,500 people whether they had recently purchased more time, how much they spent, and how happy they were. They found that, as people spent more money on purchasing time, their happiness increased.

The researchers suggest that buying time reduces feelings of pressure to get everything done, reduces negativity associated with not finishing all your daily tasks, and increases a feeling of control in your life.

I would also suggest that paying somebody to help with menial tasks like housework gives us the freedom to do things that are more fulfulling, like spending time with loved ones, exercising, or visiting a new place.

Other people

Lastly, research from Harvard Business School has revealed that spending money on other people can increase happiness.

The researchers first asked students how happy their were. They then gave each student money (either $5 or $20). They instructed half of the students to spend the money on themselves, and the other half to spend the money on others. At the end of the day, they tested whether the students’ happiness had changed.

They found that the students who spent the money on others (e.g. buying somebody a gift or donating to charity) had a larger boost in happiness than those who spent the money on themselves.

Surprisingly, the amount of money that they gave to others didn’t make a difference, the fact they did something nice was all that mattered.

“One of the reasons is that spending money on others creates social connections. If you have a nice car and a big house on an island by yourself, you’re not going to be happy because we need people to be happy.”

Prof. Michael Norton, Harvard University

Relationships are the main determinant of happiness

You might have picked up on a theme in the research above. Money can buy us happiness if it brings us closer to other people. For example:

  • Spending money on experiences brings happiness because those experiences generally happen with other people. And after they are over, we share stories with others and bond together over shared experiences.
  • Spending money on time frees us from mundane, boring tasks. We can spend that time doing things more fulfilling, like spending time with loved ones.
  • Spending money on others creates an immediate bond with other people.

“You’re creating a connection and a conversation other people, and those things are really good for happiness”

Prof. Michael Norton, Harvard University

Still not convinced?

Harvard University have been running an amazing study that has been tracking the well-being of 300 undergraduates for almost 80 years. Every few years, they ask these men (who are now in their 90s) questions to uncover the secret to happiness and healthy ageing.

They found that many of the things that they thought would be important for happiness actually don’t matter. Money? No. Social class? No. Power? No. Intelligence? No.

The study’s biggest revelation was that the only predictor of happiness is relationships. You could have a successful career, lots of money, and great health — but without loving and supportive relationships, none of that matters.

In fact, they measured each of the participants at 50 years old and found that it wasn’t their cholesterol that best predicted how long they would live. It was how satisfied there are in their relationships.

It’s hard to deny that.

What all does this mean for us chasing early retirement?

The research is clear. After we have enough money to satisfy our most basic needs — such as food, shelter and bills — then purchasing material things doesn’t make us any happier.

Instead, we should spend our money on things that help us build close and fulfilling relationships with others. And the good news is that this can be quite cheap.

So instead of buying that new laptop, think outside the box. How about hosting your friends over for a monthly dinner party? Get your friends to bring along a dish, share some nice wine, and make the most of the time you have together.

Not only will you really enjoy the time with your friends, you’ll be saving for early retirement!

Enjoy your newfound time with loved ones,

Dan's signature

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There are 1 comments on this article

  1. Avatar for Dan Montgomery

    Zack

    Awesome article Dan. Just started scrolling through all your post, loving every bit!

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