Money and Happiness

A famous study co-authored several years ago by Nobel Prize winning psychologist Daniel Kahneman offered some fascinating insights into the relationship between money and happiness. The study, which analyzed the responses of 450,000 Americans, revealed that people who earned less than $75,000 per year were more likely to feel sad or stressed about their day-to-day lives. At the $75,000 mark, this effect disappeared.

The authors didn’t say why $75,000 is the benchmark but suggested at that level it’s likely people have enough expendable cash to do things that make them feel good, like going out with friends. The more people made, the more they felt their life was going well.

On Money and Happiness

Drawing from my own experience with money and happiness I think the survey findings make a lot of sense. When money was tight and I was living paycheque to paycheque, or living beyond my means, I knew I had a spending problem, but I also had an income problem.

I started low on the totem pole, earning an entry level salary as a maternity leave replacement, before getting hired full time and getting several promotions over the next few years. My salary wasn’t quite at the $75,000 mark – I think that’s a relative number depending on the cost of living in your area – but it had doubled from where I started and the additional income certainly took the stress away.

Now that I have multiple sources of income from a successful side business, in addition to my full-time job, money is less of a worry. I’m not rich by any means, but money problems don’t keep me awake at night the way they used to when I was in my twenties. Like the study suggests, money may not buy happiness but having enough money reduces stress and allows you to focus on other aspects of your life.

Keeping up with the Joneses phenomenon

Other research on money and happiness found that it’s not absolute wealth that’s linked with happiness, but relative wealth or status – that is, how much more money you have than your neighbours. That ties into a question that behavioural economist Dan Ariely recently answered on his blog:

Q: “My partner and I make a reasonable income, and we’ve been able to save some money over the years. We can afford to move to a more expensive neighbourhood, but we aren’t sure if this is the right way to spend our money. What do you say?”

Dan Ariely’s response:

I’d be cautious about moving to a pricier area. We tend to compare ourselves with our surroundings, and our happiness stems directly from those comparisons.

 

If the people around us drive Hondas, we feel good in a Honda; if those around us drive Audis, our old Honda will make us cringe.

 

Moreover, we quickly become accustomed to the fancy new car and derive less excitement and fun from it.

 

This phenomenon is called the “hedonic treadmill”: We continuously chase prestige, thinking it will make us lastingly happy, but we rather quickly revert to our pre-purchase level of happiness.

 

So you should be careful when trying to figure out the benefits of moving. Right now, you’re probably overestimating the value of a move; six months afterward, its value is likely to seem lower. As a practical shortcut for all this, you could assume that the value of moving is only half of what it seems right now—and ask if you’d still move. If the answer is still yes, go for it; if it is no, stay put, and look for other ways to spend your money.

Another study on money and happiness from the U.K. found that the ranked position of an individual’s income best predicted general life satisfaction, while the actual amount of income and the average income of others appear to have no significant effect.

“Earning a million pounds a year appears to be not enough to make you happy if you know your friends all earn 2 million a year.”

On the surface this makes no sense. At a certain salary level – $75,000 or perhaps $100,000 – you should have enough money to live comfortably and be satisfied with your life regardless of what your neighbours earn.

Related: Why do we save?

But Ariely’s quote about the neighbourhoods we live in and the type of cars we drive holds true. We compare ourselves to those around us and measure our wealth and happiness to what we perceive our peers to be worth. Today’s social media age makes it even harder to avoid keeping up with the Joneses. We see the fancy dinners and tropical vacations and want that for ourselves.

While there’s a strong connection between money and happiness it doesn’t necessarily mean that rich people are happier than poor people, or that the relationship between money and happiness is linear. The Kahneman study found that at very high incomes more money did not increase well-being. In fact, the increases above $75,000 were vanishingly small.

What’s your take on money and happiness? Did you feel a boost in happiness as your income grew? Was there a point where your happiness was no longer linked to money or increases in salary?