For most of our lives many of us have heard the old adage “Money can’t buy happiness.” And we can all think of numerous examples of individuals where this certainly seems to be true – whether among the powerful and famous, or within our own family or group of friends. But is that really true?
Research over the last few decades suggests “NO!” In fact, many studies show that in one sense money can buy happiness. But it’s not the amount of money we have, but rather how we SPEND our money that can indeed increase our happiness – although perhaps not in the way Madison Avenue or Amazon Prime would like us to think.
First, let’s address the skeptics among you who feel sure that if you simply had MORE money you would indeed be happier. Statistics show that certainly isn’t true, since 70% of all lottery winners or those with a sudden financial windfall end up bankrupt within a few years.1 Carl Jung, famous psychologist, said in fact that the keys to happiness were five things:
• good physical and mental health,
• quality intimate relationships
• a reasonable standard of living and satisfying work
• an appreciation for beauty
• and a philosophical or religious point of view that helps us face the inevitable obstacles and disappointments in our lives.
Most of us wouldn’t argue with that list, and would agree that without things like your health and loved ones, not much else would matter. However, even when healthy and surrounded by loved ones, numerous studies show that the impact of more money on happiness eventually levels off. Certainly having more money can increase peace of mind by reducing financial anxiety and can increase a general sense of well-being and accomplishment. But for positive impacts on our day-to-day mood, we need to look at how we SPEND our money.
Spending money on “Stuff”
Originally psychologists assumed that satisfaction with material goods would be higher than satisfaction with experiences, since material items last longer than an experience. Studies, however, have shown that the opposite is true. Satisfaction over material purchases generally fades quickly. This is largely due to what psychologists call “hedonic adaptation,” a fancy term that simply means we pretty quickly take the new car, smart phone or piece of jewelry for granted. In fact, too much “stuff” can be a source of stress itself, as clutter, disorganization and maintenance can become overwhelming. I should note an important exception to the value of “stuff.” When an item is associated with a meaningful experience or relationship, it can be an enduring reminder and source of happiness itself.
Spending money on “experiences”
A 20-year study by Dr. Thomas Gilovich, a psychology professor at Cornell University, found that the joy that came from spending money on experiences was much more enduring than the satisfaction from material possessions. Some of the reasons include the fact that experiences can help form memories that are much more meaningful and enduring, often help build or enhance relationships and can expose us to new information or perspectives to keep us mentally alert and growing. The highest level of enjoyment seems to come when the experiences are connected to personal passions or interests, not to the latest “craze” everyone else is pursuing (which becomes just another form of “keeping up with the Joneses.”)
Spending money to free up our time
University of British Columbia professor Elizabeth Dunn found that another way to increase our happiness is to use some of our money to “buy our way out” of a task we dread. She says that “In terms of our happiness, time is really the fundamental currency. What really matters for your day-to-day moods is what it is you’re doing with your time.” Using that “freed-up time” wisely, to do more that you truly enjoy, is the key to reaping this benefit.
Spending money on others
In several studies, Professor Michael Norton of Harvard Business School found that money spent on others increased satisfaction in a meaningful way vs. spending on ourselves. As he studied this issue across the globe, he found that in virtually every country in the world, giving to others made people happier. Whether rich or poor, and regardless of the amount, individuals studied reported being happier (and scans of their brains backed this up). In fact, Professor Dunn’s study showed that giving to charity made as much difference in happiness as having twice as much income. But she also found that the way we give has a big impact on how much happiness we receive from the act of giving. She found that to achieve the maximum boost in happiness required seeing concrete evidence of the good your gift does, whether for a loved one or a charity.
As your financial advisors, we spend most of our time helping you set and achieve your financial goals. Building a financially secure future is important, and sometimes that means making choices to NOT spend money on certain things. But we hope all the money you do spend, now and in the future, is spent thoughtfully. By connecting your spending with what matters most to you and your family, your money truly can “buy happiness.”