There's a strong correlation between wealth and happiness. Rich nations tend to be happier than poor nations, and rich people tend to be happier than poor people. But money's impact on happiness isn't as great as you might think. If you have clothes to wear, food to eat and a roof over your head, more money has only a marginal effect on your sense of well-being. Other factors are more important.
In a 2005 issue of the Review of General Psychology, Sonja Lyubomirsky, Kennon Sheldon and David Schkade looked at years of research to determine what contributes to long-term happiness. They found that about half of our happiness is biological, determined by a sort of happiness "set point." About 40 percent of happiness comes from the things we choose to do, like exercising, setting goals and building friendships. Only about 10 percent of our happiness is based on circumstances like age, race, gender--and, perhaps surprisingly, financial status.
Although your financial situation plays just a small role in your overall happiness, it does affect it. According to a paper published in the April 2011 issue of the Journal of Consumer Psychology, some financial habits bring greater satisfaction than others.
"If money doesn't make you happy, then you probably aren't spending it right," write authors Elizabeth Dunn, Daniel Gilbert and Timothy Wilson.
They offer several principles meant to maximize happiness, including:
- Buy more experiences and fewer things. Material goods depreciate. The day after you buy something, it's probably worth less than you paid for it. Experiences, on the other hand, appreciate. Your memories of the things you do--vacations you take, concerts you go to--tend to become fonder with time.
- Use your money to help others. Personal spending has only a small effect on happiness, but pro-social spending--money donated to charity or used to buy gifts for others--consistently produces strong, positive feelings.
- Buy many small pleasures instead of a handful of large ones. This one's tough to hear on a personal level, because I tend to forego daily indulgences for big rewards. But, in the words of the authors, people are usually happier with "frequent doses of lovely things rather than infrequent doses of lovelier things."
- Pay now but consume later. Buying today but paying tomorrow leads to debt--and to unhappiness. Deferred gratification makes us happier, and not just because we avoid debt. It also builds anticipation (which is itself pleasurable) and usually leads us to make smarter choices.
- Beware of comparison shopping. If you've read The Paradox of Choice by Barry Schwartz, you know that people tend to be happier with fewer options. With fewer choices you're less likely to make a "mistake" while shopping, and there-fore less likely to suffer buyer's remorse. Plus, it can be tough to know which features actually matter most. Find a good option, go with it and don't look back.
What's the best way to be sure money will make you happy? At the 2010 Berkshire Hathaway annual shareholders meeting--also known as "Woodstock for capitalists"--Warren Buffett's business partner, Charlie Munger, shared a pearl of wisdom: "The secret to happiness," Munger said, "is to lower your expectations."
If you can't be content with what you have, you'll never lead a rich life, no matter how much money you earn.