Suppose you’re looking for a job, and you have two job offers on the table. Company A offers you a salary of $100,000, but you know the average salary there is $200,000. Company B is willing to pay only $50,000, but the average worker there earns only $25,000.
If you prefer Company B, you’re not alone. More than half the respondents to a 1995 Harvard survey preferred to make twice as much as their colleagues, even if it halved their actual income. Sometimes, what we have matters less than what we have compared to others.
This is only one of the interesting discoveries in the field of happiness economics. It explores the different ways making or using money can affect our well-being. And it’s showing that sometimes, money really can buy happiness — if you know the right ways to use it.
What Is Happiness Economics?
Economists have always asked questions about the choices people make with their money. But the focus on how those choices make people more or less happy began around the mid-1970s. In the 21st century, it has grown dramatically.
Happiness economists explore a variety of questions related to happiness and money:
- How much your happiness and satisfaction with life have to do with your income
- Which uses of your money are most likely to make you happy
- How the kind of work you do, and the amount of time you spend on it, affects your happiness
- How much financial problems, such as unemployment and debt, harm your happiness
- How your happiness relates to the wealth of others around you
- How economic factors like inflation affect happiness
- Whether people who live in wealthier nations are happier in general
- What national governments can do to make their people happier
Lessons From Happiness Economics
A 2012 paper by the New Economics Foundation (NEF) sums up the major discoveries made by happiness economists up to that point. And, as it turns out, they’ve learned that many things people tend to assume about money aren’t true.
Their findings could change the way you relate to money — earning it, spending it, and giving it away. They even have the potential to make your life happier as a whole.
Money and Happiness Study
If money really can buy happiness, it would stand to reason that earning more money would create more happiness in our lives. Researchers have begun to investigate the truth of how one’s income relates to personal happiness with a pair of landmark studies. The results are not as obvious as you might think.
The Princeton Study
One thing many people assume about money is that more is always better. However, a famous 2010 study at Princeton University suggests otherwise. The full text of the study appears in the Proceedings of the National Academy of Sciences (PNAS).
Its authors, Daniel Kahneman and Angus Deaton, analyzed a Gallup poll of more than 450,000 Americans. This poll measured happiness in two different ways.
The first was emotional state, or how happy people felt on a given day. The second was life satisfaction, or how close they thought their lives were to ideal. The researchers compared both answers to the respondents’ income to see whether money really can buy happiness.
The answer was surprising. It turns out emotional state and life satisfaction both relate to income, but not in the same way.
People with higher incomes did feel happier on a day-to-day basis — but only up to about $75,000 per year. (That’s about $94,000 in 2021 dollars.) Beyond that point, earning more made no difference to their emotional state.
But for life satisfaction – their view of how good their lives were — the finding was different. This measure of happiness continued to climb as annual income rose.
Why were the two measures different? The authors suggest a couple of reasons. For one, income affects your daily life more at lower levels. It helps you meet basic needs like health care. And it lets you do more activities you enjoy, such as spending time with friends.
Once you have enough to do these things, a higher income doesn’t affect your life so much. But it still makes you feel more successful and important. That could lead you to rate your life as better even if you don’t feel happier on a day-to-day basis.
The Wharton Study
A new study, done at the Wharton School in January 2021, partly contradicts the Princeton study. It found that all measures of happiness rise along with income well past the $75,000 mark. Even at incomes of more than $480,000, well-being was still climbing.
However, it didn’t climb at a steady rate. Instead, the relationship between higher income and happiness was logarithmic. That means happiness rises by a certain amount each time your income doubles.
Thus, the higher your income level, the less each extra dollar matters. Going from $100,000 to $200,000 will increase your well-being as much as going from $25,000 to $50,000. But for a billionaire, an extra $100,000 matters very little.
The study’s author, Matthew Killingsworth, says this doesn’t mean there’s no point “beyond which money loses its power to improve well-being.” He only argues that the cutoff is much higher than the Princeton study suggests.
He adds that pursuing money as the key to happiness doesn’t work. In his study, he asked people how much they thought money was a sign of success in life. The more they linked money to success, the lower their average well-being was.
Lessons for Happiness
You can’t easily change your income. However, you can change how rich you feel compared to others.
For instance, if you get a raise, think carefully before you decide to move into a “better” neighborhood. If you do, you’ll be surrounded by richer people, and you won’t feel all that well off compared to them.
If your current neighborhood is unsafe or unpleasant, leaving it could make you happier. If not, you’re likely to feel happy staying where you are. In your current neighborhood, you’ll be richer than most people, instead of just average.
Another helpful strategy is to focus less on your income. Based on Killingsworth’s research, the more you measure success in terms of money, the less satisfied you feel. And the more you earn now, the less benefit you get from earning more.
It’s not only your annual income that affects your level of happiness. What you do to earn that income also makes a difference. And again, it’s not just your job that matters, but how you think your job compares to other people’s.
For instance, the 2012 NEF report says being unemployed makes people unhappy. But when those people live in an area with high unemployment, they are less unhappy about it. The lost income matters less because they aren’t falling behind compared to their neighbors.
The report also says that people who work full-time tend to be happier than those who work part-time. Also, older people who have at least a part-time job are happier than those who don’t work at all.
But this doesn’t mean more work is always better. Beyond a certain point, working more hours actually makes people less happy.
Studies don’t all agree on what that point is. In a survey of 900 workers by time-management expert Laura Vanderkam, the happiest ones put in an average of 7.6 hours per day. That’s about 38 hours per week.
But when happiness expert Dan Buettner analyzed data from more than 20 million people around the world, he found a different result. He suggests a workweek of 30 to 35 hours is best for happiness.
Several studies back up Buettner’s view. In New Zealand and Sweden, companies tried cutting their work weeks to between 30 and 32 hours. Their workers felt happier and had less stress, and they performed better on the job.
There’s one thing about work that consistently makes people unhappy. It’s the time they spend commuting. The NEF report says that the more time people spend on their daily commute, the less satisfied they are with their lives.
People who drive to work are particularly likely to say they find their time in traffic to be stressful. By contrast, people who walk or bike to work are more likely to find the trip relaxing.
Lessons for Happiness
If happiness is your goal, the best job is one with a work week between 30 and 38 hours. That’s enough to be a full-time employee, but not enough to be stressed out from overwork.
Ideally, your job should also be close to where you live. That gives you a short commute — perhaps even short enough for walking or cycling. If you’re stuck with a longer commute, see if you can make it by train or bus. That appears to be less stressful than driving.
It’s clear how the money you make can affect your happiness. But studies suggest that how you spend that money is nearly as important.
Most helpful of all is spending money on basic needs. But once you’ve met those, your choices make a big difference. Spoiler alert: buying a faster car or a bigger TV isn’t likely to make you much happier. But other types of spending can.
In general, spending money on experiences makes people happier than buying material goods. In a Forbes interview, happiness economist Thomas Gilovich lists several reasons for this.
- Anticipation. According to a 2014 paper in Psychological Science, people get a lot of pleasure from looking forward to an experience, such as a concert. Waiting for a physical item doesn’t provide the same joy.
- Less Competition. A 2014 review from Cornell notes that people often compare their belongings to what their friends and neighbors have. This can make them feel inferior. But with experiences, it’s harder to do that. For example, if you go scuba diving and your neighbor goes on a wine tour, it’s harder to say one vacation is better than the other.
- Less Adaptation. According to Gilovich, people adapt very quickly to new possessions. If you buy a big-screen TV, for instance, the joy doesn’t last long. Soon you start wanting one that’s even bigger and better.
- Less Regret. Sometimes, things you buy don’t live up to your expectations. The longer you live with them, the worse your buyer’s remorse becomes. But a one-time experience is over before you have time to regret it. The fact that it ends so quickly just makes you treasure it more.
- Valuable Memories. An experience becomes part of your identity in a way that a possession can’t. A new car may change your image, but not who you are on the inside. But a long-distance hiking trip creates memories that are part of you forever.
- Social Value. Part of the pleasure of an experience comes from sharing it with others. For instance, going on vacation with family or friends helps you bond with them. In this way, spending money on experiences builds social connections that are a big source of happiness.
Many Americans feel like they have enough money, but not enough time. A 2017 study in PNAS refers to this problem as “time famine.” And it says that when people spend money in ways that relieve the problem, it makes them happier.
In the study, researchers gave a group of people $40 to spend on something that would save them time. Their choices included meal delivery services, cleaning services, and help with errands. The next week, the subjects reported feeling happier as a result of these purchases.
The next weekend, the researchers gave them another $40 to spend on physical items. But this time, they didn’t see as big a boost in happiness. On a 10-point scale, buying time made them one whole point happier than buying things.
Paying Down Debt
Another way to buy happiness with money is to pay down debt. The 2012 NEF report cites several studies that show having debt makes people unhappy. At high enough levels, it can even increase your risk of mental disorders like depression or anxiety.
However, the type of debt makes a difference. People who have a high balance on their credit cards tend to be unhappy about it. By contrast, people who borrow to gain something of value, such as a house, don’t see any drop in their happiness.
Lessons for Happiness
Based on this research, there actually are several ways to buy happiness. If you have extra cash to spend, your best choices are to pay down debt, buy time, or spend on experiences.
However, not all experiences are equal. You’ll get the most joy from an experience you can share with others. And, ideally, it should be an experience that’s some time in the future, so you can look forward to it as long as possible.
Also, don’t buy yourself the same experience too often. If you do, you can get used to it the same way you can with a new TV.
Instead, save your favorite experiences for treats. For example, enjoy a latte from the neighborhood coffee shop on Sundays only, rather than every morning. That makes it a special event rather than just part of the daily routine.
Giving Money Away
A final way to buy happiness is to spend money on other people. A 2014 article in Current Directions in Psychological Science reports that using money to help others makes people measurably happier.
But this effect doesn’t occur all the time. An article about the study in Pacific Standard explains that giving to others has the most benefit when it helps you meet emotional needs. There are three basic needs giving can satisfy:
- Relatedness. Sharing money with others gives you a chance to connect with other people. Thus, giving money to a specific person feels better than giving it blindly. Clicking a box to donate to a local animal shelter doesn’t feel as special as going to the shelter and seeing the animals your money helps.
- Competence. Giving feels better when you see it making a difference. Dropping a dollar in the Salvation Army kettle at Christmastime feels OK. But if the Santa standing by the kettle tells you how the money helps families in need, donating gives you a feeling of accomplishment.
- Autonomy. People enjoy making their own choices. Giving encourages that feeling when you can decide where and how much to give. You can see this in a Forbes video where researchers give people $20 to spend on someone else. The recipients get a lot of pleasure from planning creative ways to give away the money.
Lessons for Happiness
First, it should be a cause you care about. That increases your feeling of autonomy. Second, the charity should be able to show you how your dollars make a difference. That increases your sense of competence.
Finally, look for ways to share your giving with others. For instance, you could sponsor a friend who’s doing a walk for breast cancer rather than just giving a check to the charity. That helps a worthy cause and also strengthens your tie with your friend. It’s a win-win.
The Happiness of Nations
Happiness economists aren’t just interested in how money makes individual people happier. They also explore the ways it can affect the happiness of entire countries. To do this, they study data from worldwide surveys, such as the Gallup World Poll.
They use this information to find out which nations of the world have the happiest people. Then they try to figure out what those nations have in common. National governments can draw on their findings to steer public policy in ways that make their citizens happier.
Each year or two, the United Nations publishes a World Happiness Report. It sums up the latest findings on the happiness of countries and discusses what they mean for national governments.
Tools for Measuring Happiness
Standard economic measures like gross domestic product (GDP) don’t measure happiness. So, to compare the happiness of nations, researchers have developed a variety of tools based on other factors.
One is the Genuine Progress Indicator (GPI) developed by the Center for Sustainable Economy. It looks at over 250 measures of economic, environmental, and social health. Examples include the quality of schools and the effects of pollution.
The Organisation for Economic Co-operation and Development (OECD) has an interactive tool called the Better Life Index. It compares countries on 11 factors, including health, housing, and jobs. Users can adjust each factor by hand to see how countries stack up in different areas.
Using these and other measures, economists can explore how money relates to happiness on a nationwide scale.
Wealth and Happiness
It seems logical that wealthier countries would be happier than others. In general, the NEF report shows that this is true.
However, wealthy countries generally have other things going for them that tend to make people happy. These include democratic governments and strong social networks. Take away those advantages, and rich countries aren’t all that much happier than poor ones.
Also, growing wealthier over time doesn’t always make a nation’s people happier. Just like individuals in the Princeton study, countries appear to grow happier as a whole only until their per capita income reaches a certain threshold. This level varies from country to country.
Beyond that point, increased wealth doesn’t bring more happiness. This fact is called the Easterlin Paradox, after Richard Easterlin, who first pointed it out in a 1974 paper. Many studies since his time have backed it up.
But the Easterlin Paradox doesn’t always hold true. For instance, in Italy and Japan, happiness has risen along with economic growth.
Moreover, recent research outlined at VoxEU.org shows that happiness drops when a country goes into an economic depression. This happened in Greece in 2008. So, while good economic times don’t always make a country happier, bad times definitely make it less happy.
Effects of Public Spending
According to the NEF report, most studies show people tend to be happier in countries with higher levels of public spending. More recent studies from 2017 and 2019 back up this finding. And it’s consistent with the happiness rankings in the latest World Happiness Report.
However, results aren’t completely consistent on this point. At least one study covered in the NEF report found no correlation between public spending and happiness. A 2021 study in Review of Economics and Political Science found the same thing.
One study cited in the NEF report found that strong unemployment benefits actually reduced happiness. However, newer studies don’t support this view.
For instance, a 2020 study in Luxembourg explored how much happiness fell in different countries during the Great Recession. It found that happiness declined less in countries with better unemployment benefits.
Effects of Inequality
The NEF report also shows that higher income inequality in a country usually means lower happiness. However, the relationship isn’t a simple one.
The World Bank measures inequality using a tool called the Gini coefficient. Countries with higher Gini scores are less equal. And, as a rule, these countries also rank lower on the Better Life Index.
But the results are mixed. Inequality is more strongly linked to unhappiness in some countries than others. In fact, in a few countries the relationship seems to be reversed.
A 2017 paper in Frontiers in Psychology found that the relationship between happiness and equality is a U-shaped curve. A little bit of inequality makes people happier. Seeing others who are richer than them gives them a belief that they have a chance to grow rich too.
But when inequality gets too high, people are less happy. The gap between rich and poor seems so big that people don’t think they can ever catch up.
A couple of studies in the NEF report suggest that inequality bothers people less when “perceived social mobility” is high. People don’t mind a large gap between rich and poor so much if they think they have a good chance to move up the social ladder.
Clearly, the question, “Can money buy happiness?” has no simple answer. It depends on how much money you’re talking about, how you intend to use it, and what exactly you mean by happiness.
However, one thing that happiness economics definitely shows is that money isn’t the only key to happiness. And the more money you have already, the less important it is to have more.
So the next time you have a decision to make about money, don’t just think about what would be best for your bottom line. Instead, take a moment to consider what would actually make you happiest. Because that’s the real bottom line.