For many people diligently building their nest egg, the question of money’s link to happiness is a natural one. After all, financial security can reduce a significant source of stress. But can simply having more money guarantee a life filled with joy?
What does the research say?
A landmark 2010 study by Princeton’s Daniel Kahneman and Angus Deaton found that increased income positively affects day-to-day happiness, but only up to a point - roughly $75,000 annually in the US (equivalent to almost £58,000 in the UK).
This was contradicted by research published in 2021 by the University of Pennsylvania’s Matthew Killingsworth, suggesting happiness continues to rise steadily with income, even above the $75,000 mark!
To settle the debate once and for all, Killingsworth, Kahneman and Professor Barbara Mellers teamed up in 2023 to find the answers. They found that within each income group, some individuals start off unhappy and then experience a significant increase in happiness until they reach an annual income of $100,000 (£75,000). After reaching this point, their happiness levels plateau. So, it’s clear the relationship between happiness and money isn’t always straightforward.
But what can we do if we want to find more happiness from the money we have? Putting income aside, there are two aspects of our money that can greatly impact our happiness: how you get your money and how you spend it.
How you get your money matters
Research by Harvard Business School professor Michael Norton and Ph.D. student Grant Donnelly, found that people who earn their wealth tend to be happier than those who inherit it.
The study surveyed over 4,000 millionaires worldwide to understand the impact of wealth on happiness. The findings revealed that self-made millionaires were happier than those who inherited money or married into wealth.
Occupational Psychologist and chartered member of the British Psychological Society, Kim Stephenson says: “What they’ve generally found is there’s a happiness set point. So, if you have a lottery win, it’ll boost happiness for a while. Then it usually sinks back [to how it was before]. And if you have a serious accident or you lose money, you tend to ping back. Part of the secret of it is learning how to push your set point up.”
Why might this be the case?
Lottery wins or unexpected inheritance can bring a sudden influx of wealth. While this may initially create a sense of excitement and euphoria, the sudden change in financial circumstances can also lead to challenges in adjusting to the new lifestyle.
Windfalls can create strains in managing finances, as you may not have developed the financial skills necessary to handle large sums of money. Without proper financial planning, the wealth can quickly diminish, leading to financial stress and instability.
On the other hand, income earned through work typically offers a sense of control and stability over your financial situation. Regular paychecks allow individuals to plan and budget, providing a greater sense of security and peace of mind.
Work often plays a central role in shaping your identity and providing a sense of purpose. It can also foster social connections, as colleagues and professional networks offer opportunities for social interaction and support.
How you spend your money matters
Research from Dr. Elizabeth Dunn, Chief Science Officer at Happy Money and PhD student Iris Lok found that people who had donated to charity were happier than those who hadn’t.
The study found that people who spent on social experiences and time-saving services were happier. In other words, when we use our resources to benefit others and prioritise our time wisely, we tend to feel more life satisfaction.
Co-Founder of The Humble Penny and The Financial Joy Academy, Ken Okoroafor says: “How can you commit a little bit of money, or maybe even no money, to [something] that gives you joy every week. So, for me, on Fridays I go on a date with my wife. We go to the cinema, go for a walk and maybe stop off for a mocha. I’m really experiencing joy every week. It’s planned, it’s intentional, it could be low cost, and it works, and everyone can attain that.”
Why might this be the case?
There are several reasons why spending money on others and investing in experiences and time-saving services (such as hiring house cleaners or ordering food delivery) can contribute to greater life satisfaction.
Firstly, when we give to others or contribute to charitable causes, it creates a sense of purpose and fulfilment. Knowing that our actions have made a positive impact on someone else’s life can bring a deep sense of joy and satisfaction.
Secondly, spending on social experiences allows us to connect with others, fostering meaningful relationships and a sense of belonging. Human beings are social creatures, and the quality of our relationships play a significant role in our overall happiness.
Lastly, investing in time-saving services frees up valuable time that can be spent on activities that bring us joy and fulfilment. By outsourcing tasks that we don’t enjoy or that consume a lot of our time, we can focus on activities that align with our passions and values.
Summary
Money provides us with the means to fulfil our needs, pursue our goals, and enjoy certain pleasures in life. It offers a sense of security and freedom, allowing us to experience a higher quality of life. However, it’s important to recognise that money alone doesn’t guarantee happiness.
Here are three key takeaways on how to use your money to increase your happiness.
- Focus on experiences, not spending - invest in experiences for lasting memories and long-term happiness. Prioritise activities and resources that enhance your physical and mental wellbeing, like gym memberships, yoga classes, therapy sessions, or wellness retreats.
- Invest in personal growth - use your money to develop new skills and expand your knowledge. Take classes, participate in workshops, or seek guidance from a mentor.
- Practise mindful spending - align your expenses with your values and priorities. Support your hobbies, passions, or values by spending on books, art supplies, or charitable donations. By being intentional, you’ll derive greater happiness from your purchases.
Listen to episode 30 of The Pension Confident Podcast and hear from our panel of expert financial guests as they discuss how you can use money to maximise your own happiness and the pitfalls to avoid. You can also watch the episode on YouTube or read the transcript.
Risk warning
As always with investments, your capital is at risk. The value of your investment can go down as well as up, and you may get back less than you invest. This information should not be regarded as financial advice.
