There is a link between wealth and happiness, but it’s not that having more of the former results in more of the latter. The Journal of Consumer Research published a study involving a scientific analysis of the link between money and happiness designed and analyzed by researchers at the University of British Columbia, Harvard University, and the University of Virginia. The study indicated there is a direct link between wealth and self-reported satisfaction with one’s life, but no such correlation between wealth and a measurement of happiness.
The study looks at reasons this may be the case, and through a number of investigations, concludes the following:
This suggests that our money provides us with satisfaction when we think about it, but not when we use it. That shouldn’t happen. Money can buy many, if not most, if not all of the things that make people happy, and if it doesn’t, then the fault is ours.
I understand this. When I look at my life objectively, I see I should be happy. I’m financially independent, and I have access to anything I need and many things I want. I am in charge of my daily schedule, and I can spend my time doing whatever I like. Objectively, my life is very satisfying. So why am I not as happy on a day-to-day basis as I think I should be, given these circumstances?
According to the study, it’s because I — and, on average, everyone else — don’t spend wealth in a way that would lead to happiness. Maybe you can relate to this, too. Wealth provides access to many things that can contribute to a happy life, like better nutrition, healthcare, leisure time, and jobs, but these don’t necessarily contribute to self-reported happiness.
The analysis group of studies included in the published paper leads to eight approaches to spending money that will result in more happiness. Some of the suggestions are common-sense approaches to money management that I’ve written about on Consumerism Commentary, while others seem to oppose what financial advisers, planners, and authors present as good money advice. In the coming weeks, I’ll address each of these eight principles more in depth.
1. Buy experiences instead of things.
A few years ago, Laura Rowley, author of Money and Happiness: A Guide to Living the Good Life, was a guest on the Consumerism Commentary podcast. She pointed to an earlier study that showed that happiness plateaued at a household income of level of $75,000. There’s a lot of criticism of this study because, among other things, $75,000 in one location like New York City means something else to a family than $75,000 earned in rural Ohio. The study itself was recently debunked, but some of the conclusions still make sense with the new information.
One of these conclusions is that it’s better to to frame your financial choices in terms of experiences, as Laura Rowley mentioned in the podcast. Experiences create memories that contribute more to happiness than what you might achieve by buying products.
2. Help others instead of yourself.
Anything people due to nurture social connections with others increases happiness, and wealth can be used in such a manner. The study showed that those who spend more of their wealth on gifts for others and on charitable contributions than on bills and gifts for themselves are happier. Not only does prosocial spending affect self-reported happiness, but another experiment shows that the behavior created happiness that’s visible when observing the brain’s neurons.
3. Buy many small pleasures instead of few big ones.
The study uses this example to illustrate this point: “Eating a 12 oz cookie is not twice as pleasurable as eating a 6 oz cookie because the first X% of a cookie’s weight accounts for more than X% of its hedonic impact.” This is one of the reasons why it’s better to take your finite financial resources and spread them out over many things you find pleasurable rather than reaching for the experiences that are the most expensive. While the first principle might say it’s better to go on one $2,500 cruise than buying one $25,000 television, this principle says it’s better for your happiness to go on 50 dinners than one cruise.
4. Buy less insurance.
Most Americans are under-insured. An emergency fund is a type of self-insurance against the likelihood of a short-term financial setback, but this often needs to be supplemented with health insurance, life insurance, car insurance, and renter’s or home insurance. Many people need some form of general liability insurance, too.
These are all good uses of money, even though they might not correlate directly to happiness. But because consumers overestimate how much they’d be affected by a broken object, they’re led to extend the concept of insurance to the things they buy. Salespeople use this apprehension to sell extended warranties for products. Studies show that people are not generally affected negatively when products break without a warranty or generous return policy. If you are told that “all sales are final,” you appreciate the purchase much more.
5. Pay now and consume later.
The societal norm today is to consume now and pay later. That’s the premise of the credit card industry, and we’re lured into that spending behavior with generous cash back offers and other perks. We can delay the pain of parting with our money at the same time we advance the opportunity to consume. Shortsighted behavior results in financial problems in the future, and that’s one reason why the opposite approach increases happiness.
The other reason is that delayed gratification increases anticipation, and resolution of the feelings of anticipation inspire happiness.
6. Think about what you’re not thinking about.
When you daydream about the future, you’re more likely to think about it in abstract terms. As you get closer, whether in time or in physical space, details begin to emerge that cloud your happiness. This is apparent when you’re planning for a vacation. Six months in advance, your trip to Walt Disney World seems like a great idea, but as the time to depart gets closer and the details come into focus, you begin to think about all the frustrations you will experience. Those details, good and bad, will affect your level of happiness when the time comes, more than just the fact that you and your family are at Walt Disney World.
Thinking about those details in advance will prepare you for the future and will help you make better decisions about the future in terms of your happiness.
7. Beware of comparison shopping.
This gets interesting. Comparison shopping is a tool of the frugal consumer. It’s good to make a purchasing decision based on all data available, even if price is just one part of the comparison. Comparison shopping so so popular that there are even sections of Consumerism Commentary designed to help people make decisions about their money. Consumer Reports helps people, too, by rating products within appropriate categories to make informed decisions about spending money.
It turns out that shopping based on comparisons — which focus on how one version of a product differs from another — take focus away from attributes that are more likely to make someone happy. You can use online tools to compare a car’s specifications. Shoppers can determine what facts from among the categories will result in the best purchase, but the factors that contribute to happiness with a car purchase — perhaps the feeling of envy from friends, whether the driver’s seat fits you perfectly, or whether there’s enough room to make love in the backseat — are not listed or not really considered when shopping using a financially responsible, comparison-based approach.
8. Follow the herd instead of your head.
The best way to predict enjoyment of an experience is to see how much other people enjoyed the same experience. Going back to the Walt Disney World example, if more of my friends shared with me, more stories about their enjoyment of the vacation, the more I will enjoy my vacation there. Seeing that others are happy with their decisions increase our own happiness with the same decisions. In an experiment, women predicted how much they’d enjoy a date using two methods. The first was by photograph and biography of their date alone, the second was based solely on another woman’s previous analysis of the date. Those who received the photograph and biography made more inaccurate predictions of how they would enjoy their date.
Is your goal in life to be rich in financial terms only or do you want to be rich in happiness, as well? If you like the idea of living one happy experience after another, then it takes more than just wealth and financial independence. How you spend your money determines whether you’re happy. These principles should help you use your money in ways that are more likely to produce happy feelings.
There is much depth in these principles, so this article is just an overview. Each principle deserves its own analysis. For more information on the experiments conducted that led the researchers to these suggestions for happiness, read the study linked below.