Are You Really Happier with More Money?
The optimal income for life satisfaction in North America is $105,000 per year.
That’s according to a 2018 study conducted by researchers at Purdue University on more than 1.7 million people, in every region of the world.
Whatever you make beyond that level is not associated with greater life satisfaction. In fact, it reduces life satisfaction.
This $105,000 income cutoff is deemed the “satiation point.” Someone pulling in $250K is no happier or satisfied with his or her life than someone making $110,000.
The research concluded that people with higher incomes are in fact happier. What wasn’t mentioned in the study, however, were spending habits. More specifically, how to spend your money to make you happy.
The saying, money can’t buy happiness is misleading. Elizabeth Dunn, co-author of Happy Money, associate professor of psychology at the University of British Columbia, knows this all too well.
Dunn’s been studying money and its relationship with happiness for a long time and says, money can buy happiness if you follow the five core principles of happier spending.
Principle #1 – Buy Time
“Before you reach for your wallet, try just stopping and ask yourself, ‘How will this purchase affect the way I spend my time?'” says Dunn. “And if the purchase isn’t going to have much of an impact on how you spend your time, your money might be better spent somewhere else.”
“What matters for your wellbeing is what you’re doing with the minutes and days of your life,” says Dunn. “If you have a lot of money and a lot of nice stuff, but you’re spending your time doing things you dislike, then your minute-to-minute happiness and overall happiness is likely to be pretty low.”
Dunn surveyed more than 6,000 people in four countries and also ran an experiment in which she gave people $40 for two weeks.
One week, participants had to buy something material and the following week, they used the money to buy themselves time, like hiring someone to mow their lawn or clean their house, or deliver them food.
People reported feeling happier when they used their money for time-saving services than on material things.
“Buying time is not only for rich people,” says Dunn. The average amount of money people in the study spent on time-saving costs was between $80 to $100 a month, but even the $40 they were given in the experiment created a notable difference in their happiness.
Principle #2 – Buy Experiences
“People actually get more happiness from buying experiences like trips and special meals than from buying material things like gadgets, clothes, or shoes,” says Dunn.
Dunn also said buying experiences as gifts for others (tickets to a baseball game or spa day) versus material things also delivers more happiness for those receiving the gift.
Which is something to consider when buying gifts for loved ones for birthdays and special occasions.
There’s one caveat though: Dunn says, “If somebody has told you they really want a new pair of shoes and you say, ‘No-no, I am going to buy you an experience, that’s probably a bad call. Because it turns out people really like getting the things they have asked for. If somebody has told you what they want… for the love of God, just get them that.”
Principle #3 – Pay Now, Consumer Later
“Almost everything about modern society pushes us to consume right away, and often pay for it much later,” says Dunn. “What we find is people are better off doing just the opposite. So, you’re more likely to get happiness from your spending if you can pay upfront, and actually delay consumption.”
For example, if you’re planning a trip and you can either pay for it a month in advance or put it on your credit card and pay after the trip. By paying in advance, you get the pain of paying out of the way, and you get to enjoy the pleasure of anticipation. “It is good to separate payment from the experience itself,” says Dunn.
Principle #4 – Make It a Treat
What if you could have all your favorite things all the time? You’d probably be unhappy. “The idea here is that having our favorite things a little less often can actually enhance our ability to enjoy them,” says Dunn.
One of the fundamental lessons of happiness research is that the more we have of something the more we tend to get used to it and lose the same sort of intense pleasure we got when we first experienced it.
Dunn gives this example:
In Vancouver, where she lives, kale is popular, and she started drinking a $7 kale smoothie from Whole Foods. “At first it was kind of like a treat – I really enjoyed it, but pretty soon it just became the drink I would suck down on any kind of afternoon,” said Dunn. “And while it is perfectly healthy, it is not the cheapest way to consume kale, so my kale budget was kind of spinning out of control with these smoothies.”
Dunn took a break from kale smoothies and switched to only having them once in a while. By doing that, Dunn says, she “actually renewed my capacity to appreciate them again, and that’s what we see in our research lab as well.”
Her advice: Taking a break from the things you enjoy can renew your capacity for pleasure. Plus, it could save you some money.
Another example Dunn gives is driving a nice car. “Purchases such as cars that we drive everyday don’t seem to make much of a difference for our happiness as we might assume,” says Dunn. “People actually get no more enjoyment from driving a BMW than from driving an economy car, because it is something they do so habitually every day. The pleasure of the extra features kind of fade into the background.”
So, again investing your money in purchases that you constantly use constantly may not actually deliver happiness. It’s better to be more strategic with your spending.
Principle #5 – Invest in Others
“When people spend money on others, they actually get more happiness than from spending it on themselves,” says Dunn.
Donating to a charity can especially lead to happiness. “People who donate to charity are happier than those who don’t, even after taking into account things like their level of wealth,” says Dunn.
The recent social media trend where people are asking someone to donate to a favorite cause on their birthday is a good thing, says Dunn. “There is actually research showing, even older research predating social media, that the most common reason people say they gave to charity is because someone they know asked them to make a donation.”
But there’s one caveat to donating to charity: “Auto giving,” where you automatically contribute monthly or yearly to a charity, may not lead to increased happiness. “That whole set-it-and-forget it sort of thing also means you are probably not getting much of a burst of happiness when that $100 disappears from your bank account every month,” says Dunn.
So, it’s best to make giving to charity memorable. One way Dunn is trying to make spending money a more conscientious habit is through her new app, Joy.
“The idea is that it enables people to reflect on their purchases and decide whether each purchase for them was happy money or sad money,” she says. “So, each time people make a purchase they are prompted to… either hit a happy face or a sad face.”
And over time, the app accumulates enough data to deliver personalized insight about your spending and happiness.
Bottom line? While money can play a role in happiness, remember to consider what you’re buying and what you’ll actually get out of the purchase.
Remember the longer term benefits and not just the immediate gratification the next time you open your wallet.
To a richer life,
— Nilus Mattive
Editor, The Rich Life Roadmap