The Situation of Money-Based Happiness

An excerpt from a recent, terrific New York Times piece by Elizabeth Dunn and Michael Norton:

The notion that money can’t buy happiness has been around a long time — even before yoga came into vogue. But it turns out there is a measurable connection between income and happiness; not surprisingly, people with a comfortable living standard are happier than people living in poverty.

The catch is that additional income doesn’t buy us any additional happiness on a typical day once we reach that comfortable standard. The magic number that defines this “comfortable standard” varies across individuals and countries, but in the United States, it seems to fall somewhere around $75,000. Using Gallup data collected from almost half a million Americans, researchers at Princeton found that higher household incomes were associated with better moods on a daily basis — but the beneficial effects of money tapered off entirely after the $75,000 mark.

Why, then, do so many of us bother to work so hard long after we have reached an income level sufficient to make most of us happy? One reason is that our ideas about the relationship between money and happiness are misguided. In research we conducted with a national sample of Americans, people thought that their life satisfaction would double if they made $55,000 instead of $25,000: more than twice as much money, twice as much happiness. But our data showed that people who earned $55,000 were just 9 percent more satisfied than those making $25,000. Nine percent beats zero percent, but it’s still kind of a letdown when you were expecting a 100 percent return.

Interestingly, and usefully, it turns out that what we do with our money plays a far more important role than how much money we make. Imagine three people each win $1 million in the lottery. Suppose one person attempts to buy every single thing he has ever wanted; one puts it all in the bank and uses the money only sparingly, for special occasions; and one gives it all to charity. At the end of the year, they all would report an additional $1 million of income. Many of us would follow the first person’s strategy, but the latter two winners are likely to get the bigger happiness bang for their buck.

We usually think of having more money as allowing us to buy more and more of the stuff we like for ourselves, from bigger houses to fancier cars to better wine to more finely pixilated televisions. But these typical spending tendencies — buying more, and buying for ourselves — are ineffective at turning money into happiness. A decade of research has demonstrated that if you insist on spending money on yourself, you should shift from buying stuff (TVs and cars) to experiences (trips and special evenings out). Our own recent research shows that in addition to buying more experiences, you’re better served in many cases by simply buying less — and buying for others.

Read the entire article, including their discussion of value of “underindulgence.”

Happy Money: The Science of Smarter Spending (Simon & Schuster), co-authored by Elizabeth Dunn and Michael Norton, is due out in the spring of 2013!

Pre-order it on Amazon here.

Related Situationist posts:

• Adult Well Being and Social Connection
• Dan Gilbert on the Situation of Happy
• On Money and Motivation
• The Situation of High Marginal Income Tax Rates and Motivation
• Money and the Situation of Happiness
• The Situation of Money and Happiness
• Receiving by Giving
  
• Something to Smile About
• Resisting Materialism
• Redirect
• Money Priming
• Body Image and Materialism
• Law, Competition, Self-Interest
• The Situation of Being Green
• The Situation of Objectification
• The Situational Effects of Wealth and Status
• Shocking for Money