Can Money Really Buy Happiness?

Academic research has long sought to explore a link between money and happiness. But can money really buy happiness? And what are the implications on our own relationships with money?

Few phrases have the power to stoke debate like “money doesn’t buy happiness”. After all, most of us could do with a bit more of it. And most of us have a pretty good idea of how more of it could make us happier.

But what’s interesting is where this view diverges.

On the surface, we might see the super-rich and super-poor as the leading bastions of the money-doesn’t-buy-happiness adage. The super-rich, on the one hand, might have everything they’ve ever wanted. And yet might claim their wealth accumulation has never really left them feeling permanently happy (more on that little phenomenon later). The super-poor, meanwhile, might excuse their wealth deficit by politely pointing out that money doesn’t make a blind bit of difference to happiness – and that’s what really matters in life.

We’re left with something of a divide in our perspectives on the question of money and happiness. Because, in short, we view the issue from different vantage points. That’s why some of the academic research on money and happiness can help us make sense of this debate.

The ‘hedonic treadmill’

“A true saying it is, Desire hath no rest, is infinite in itself, endless, and as one calls it, a perpetual rack, or horse-mill.”

Robert Burton, 1621

Robert Burton wrote that in 1621 in Anatomy of Melancholy. He was alluding, of course, to the idea that our desire is boundless. That as we achieve one thing, our sense of fulfilment or happiness is temporary, before we desire more.

In 1971, two researchers began to consider this effect in relation to wealth accumulation. According to Brickman and Campbell’s theory, as a person makes more money, their expectations and desires rise in tandem. The result, they argued, was that they experience no permanent gain in happiness.

More than twenty years later, Michael Eysenck, a British psychologist, compared this idea to a person walking on a treadmill, powering along but ultimately staying in the same place. And so the idea of a ‘hedonic treadmill’ was born in the psychology literature.

As early as the 1970s, empirical studies started to emerge to support the idea. In one study in the Journal of Personality and Social Psychology, researchers interviewed a group of people who had won a large amount of money on the lottery and a group of accident victims that resulted in paralysis. Remarkably, the research revealed that neither group appeared to be happier than the other in the long term.

It seems, according to these lines, that our happiness simply resets. But this is all a bit worrying in isolation. If we’re forever stuck on this hedonic treadmill, how can we aspire to be happy?

You’ll be relieved to hear that the hedonic treadmill should be taken with a pinch of salt. A subfield of positive psychology has set out to illustrate that our level of happiness isn’t bound to a set reset point. But it’s a powerful theory, nonetheless – and it does illustrate an important point. It shows how our perspectives on how a heightened level of wealth would feel and how it really feels are markedly different.

The correlation between money and happiness

But what of the statistical relationship between money and happiness?

Well, the consensus seems to be that there is a correlation between money and happiness – but only up to a point. A recent article on the World Economic Forum, for example, collated data from the World Bank and World Happiness Report, showing a positive correlation between GDP per capita and happiness.

But there’s a problem. This correlation between money and happiness lasts only up to a point. After that, we appear to experience diminishing happiness returns on our increased wealth. On a global per capita basis, Ed Diener and Martin Seligman suggest this point is $10,000 per capita income. And they identified a much weaker correlation when economies below this point were excluded from these calculations.

What’s more, similar studies at a national level have yielded aligned results. In 2010, for example, research by Daniel Kahneman and Angus Deaton identified a correlation between money and a measure of happiness up until a threshold annual income of $75,000 was reached. After that point, it seems we rapidly experience diminishing happiness returns.

The upshot is that the correlation between money and happiness appears stronger in poorer than in wealthier societies – and that strong positive correlation holds true only up to a point. But there’s also a distorting factor at play before diminishing returns kick in. You see, it’s be shown that happier people subsequently earn higher incomes than unhappier people. So this appears to call the idea of causality between happiness and income into question.

The pursuit of happiness

Let’s pause and digest. Correlation isn’t causation, but people on higher incomes tend, overall, to have higher levels of emotional wellbeing than people on lower incomes. Read into that what you will.

But there is a bigger question afoot here. Should we be pursuing more money because we think it will bring us more happiness?

If you’re relentlessly pursuing pay rises, fighting up the corporate ladder and working endless hours solely because you think the money will make you happier, have a rethink. First, the statistics aren’t as preferable as you might think. The evidence actually suggests a stronger correlation between money and happiness is present for those experiencing slow and gradual income gains. And second, your motives are wrong. Money in itself isn’t a magical elixir that creates happiness, nor an anti-depressive.

Similarly, if you’re pursuing early financial independence because you think you’ll inevitably be happier when you achieve it, you’re going about it the wrong way. Live well now and plan well for later. Find the right balance.

Our finance journeys can become all-absorbing. It’s easy to think of the end state as the light at the end of the tunnel. But this is a slippery mental slope. This way of thinking can undermine not only our current emotional wellbeing, but also our financial objectives themselves. So don’t obsess over money because of the emotional results you rightly or wrongly think it will bring.

As I contemplate my own vision of financial independence, it’s about freedom to choose. Financial independence is not a guarantee to feel happier and more fulfilled, and it shouldn’t be considered as such. The approach must to be twofold, prioritising now and later.

It’s a question of balance. And whether money can buy happiness or not, we should never cast our now by the wayside in favour of our later.

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