Can Money Buy Happiness? Here’s the Magic Number Researchers Have Found

BY LANCE ALSTON

photo: zabalotta photocase.com

Money and Happiness: Rethinking the Relationship

Can money buy happiness? It’s a question philosophers have asked for millennia. While there is still plenty of debate on the topic in economics, just about everyone agrees money can only get you so far when it comes to happiness. That is, a lot more money only makes you a little bit happier, if at all.

As Ben Casnocha, an entrepreneur and best-selling author based in Silicon Valley, noted when it comes to billionaires, “Some of them are quite happy… But many of them are not happy or have prolonged bouts of unhappiness—even though they’re way ahead in the global rat race.”

If billions of dollars might not be enough, what can we conclude about money and happiness? Well, one recent study  has even given us a number to work with—$75,000. According to Angus Deaton and Daniel Kahneman, both Nobel Laureates in Economics, an annual family income of $75,000 could take you to the top level of emotional happiness. Anything more than that might get you more things to buy and more social status, but it probably won’t add much to your long-term happiness.

“Money has never made man happy, nor will it; there is nothing in its nature to produce happiness.”

— Benjamin Franklin

Stop for a moment and ask yourself how you feel about that number. Would $75,000 be enough for you? If not, then why? How much would be enough?

Despite the evidence that more money can’t buy more happiness, the financial services industry continues to ignore the fact that money and happiness are only distant cousins. They prefer instead to pretend the two are close, intimate friends. This is because the bank and brokerage business model is built on a single promise—more money. Wall Street sells greed because that’s something you can put a number on. If you want to double your money, reach $1 million or retire by the time you’re fifty, Wall Street has a plan to sell you. But Wall Street only knows how to keep score in dollars.

Happiness, well, that’s not so easy to put a number on. It can’t be hedged or shorted, and you can’t put it in a presentation with flashy charts and graphs. If you’re interested in something more than money—if you’re looking for happiness or a meaningful life—Wall Street can’t help you. It’s up to you to envision a future that includes a lot more than just money.

Happiness is clearly an important concept, or so the Founding Fathers thought. They imbued our Declaration of Independence with its importance, holding happiness out as a standard for the citizenry:

We hold these truths to be self-evident, that all men are created equal, that they are endowed by their Creator with certain unalienable Rights, that among these are Life, Liberty and the pursuit of Happiness.

Research tells us factors such as good health, friends, freedom, security, and trust are all important to our long-term happiness. Conversely, factors like unemployment, inflation, and chronic pain chip away at the joy we find in life.

Maybe money cannot buy you happiness, but what if there were a formula that could point the way to a deeper and wider range of happiness in your life? Enter happiness research—a confluence of research from the fields of neuroscience, sociology, psychology, and economics—which is shedding new light on what truly makes us happy. And, unlike most current work in economics, the research on money and happiness provides answers we can immediately apply to our everyday lives.

The formula for happiness turns out to be fairly straightforward: H = S + C + V.

H = sustained happiness. Not the kind you get from a piece of chocolate cake or a great first date but rather the kind of ongoing happiness you carry with you throughout your life. The type of real happiness humans long for and our Founding Fathers had in mind.

S = your individual set point. This is your natural level of happiness, akin to your body temperature or heart rate. They may go up or down for periods of time, but your temperature and heart rate will eventually settle back to your natural, steady state. Your level of happiness behaves the same way. In fact, when it comes to wealth and your set point happiness, researchers have found that even multimillion-dollar lottery winners eventually settle back into their previous level of happiness. There is a wide range to set-point happiness, and some people are naturally happier than others. This doesn’t mean you are powerless when it comes to your happiness, however. The good news is less than 50 percent of your happiness is attributable to your set point, which means you can control much of your own happiness if you choose to.

C = conditions in your life. These are the things you cannot change in your life, such as your race, age, or childhood family situation, and things that may change slowly over some extended period of time, like marital status and occupation. Think of conditions as the elements of your life that remain relatively constant from one day to the next. The good news here is humans are very, very adaptable to the conditions in their lives. Even serious cancer patients and impoverished third-world communities can report relatively high degrees of happiness.

And finally,

V = voluntary activities which you have immediate control over. Prayer, meditation, social involvement, exercise, and volunteering are all examples of the kinds of choices you can make regarding your time, money, and energy from day to day and hour to hour that can have a lasting impact on your happiness.

In short, despite the fact that money can’t buy happiness, there are lots of things that can affect your happiness—some you can change and some you can’t. This article is about taking the emphasis off money—something that will probably have very little influence on your happiness—and focusing on the voluntary activities that just might make you happy for the rest of your life. Your conditions do not define your happiness, unless you let them.

Choice Conflict—Limit Your Options If You Want to Be Happier

Like many of the concepts we’ll discuss regarding money and happiness, too much of a good thing can lead to less happiness. Take choices for example; we know from the research that greater control over your living space, career path, and representative government—just to name a few examples—can significantly improve your happiness. Humans want to have choices when it comes to their environment. However, too many choices can paralyze you, often leading to no choice being made at all. Professor Barry Schwarz describes this as the paradox of choice.

Choice overload, as he calls it, encroaches into our everyday lives in powerful ways—from our trips to the grocery store to the investments we make in our 401(k)s. In the early 90s I studied Russian from an amazing professor in Washington, DC. He was a native Russian speaker but also fluent in English, French, Greek, and probably a few other languages I wasn’t aware of. In addition to his teaching workload, my professor volunteered his time helping Soviet emigrants assimilate into their new lives in the United States. Remember, these were the first few years of “Perestroika,” Russia was still part of the Soviet Union, and hundreds of thousands of Russians were fleeing each year.

Those Russians had rarely experienced freedom of choice in more than four generations. Choosing a career or where to live were not unbounded options for most Soviet citizens. My professor would take these new arrivals shopping and help them search for jobs and find housing in the Washington, DC, area. The stories he retold to our evening class were tragic, real-life examples of choice overload, which can impact how you spend your money and your happiness.

Even the simple process of choosing toothpaste or cereal for their kids could be overwhelming in the West. Where they were used to one or two options on the shelves in Moscow, they now faced one or two aisles of choices, four rows high. Incredibly, my professor shared more than one story of families returning to Russia because they were simply unprepared for the massive range of choices their new lives offered. Returning to the question of whether money can buy you happiness, it can give you more choice, but this isn’t always a good thing.

In his book The Paradox of Choice, Barry Schwartz challenges the idea that having more choices is always better for us. In fact, he argues that seeking the very best may actually leave us worse off. By setting your standard to “the best,” you may be condemning yourself to a relentless feeling of “what if.” What if I had acted sooner; waited longer; done more research; known about this or that resource? Schwartz calls this “maximizing,” and this type of behavior can be counterproductive.

In effect, Schwartz recommends we lower our standards. Striving for “good enough” will lead to happier and healthier lives, with less stress and far more time for the important people who matter. He calls it “satisficing,” and it may be the solution in our age of too much information and too many choices. But you must choose to strive for “good enough.” It might not feel natural, may even seem like losing to some, because as a culture we tend to place a high value on winning. Will “good enough” be good enough to feel as if it was a success?

This is where Wealthfulness comes into play. You have a choice—to win the battle or win the war. Wealthfulness is a mind-set that can lead to a healthy, happy, and full life, but it might just entail satisficing when your natural inclination is to maximize. “The Best” is just today’s little skirmish—occasionally important, but probably not.

 Running Toward a Number

 “The elephant cares about prestige, not happiness.”

One of the most interesting findings in the research on wealth and happiness and whether money can bring happiness is the universal tendency for humans to prefer relative wealth over absolute wealth. What this means is a wealthy farmer in China with a few cows will generally report feeling just as happy as a wealthy farmer in Texas with a herd of six hundred cows. People tend to compare themselves with other people in their community, and consequently their happiness can rise or fall depending on where they see themselves in comparison to those around them. This might be why you often see a highly successful sibling or in-law as the antagonist in movies and books; they become constant reminders of our relative wealth.

I would venture to say the most frequent question I’m asked when discussing someone’s financial plan is, “How are we doing compared to everyone else?” The correct answer is, of course, it doesn’t matter.

Lee Eisenberg wrote a book several years back called The Number, in which he argued everyone has a “number”—the money in the bank they want to have when they retire. Eisenberg got the idea for his book from his conversations with Wall Street bankers and traders, who he said ALWAYS had a number.

The interesting thing, though, is Eisenberg found the number would change as their salaries and bonuses inflated. Their number got bigger because everyone around them was receiving a lot more money, too. Who could be happy with $2 million in retirement, which seemed like so much money at one point, if it’s less than your friend’s bonus last year? It’s not the amount of wealth that influences happiness, but what you have relative to your neighbors.

This idea of comparing ourselves to those around us and constantly trying to keep up is related to something psychologists call the hedonic treadmill. The idea is derived from the word hedonism, meaning the pursuit of pleasure. The hedonic treadmill is simply a constant and increasing cycle of materialism in search of pleasure.

As Carol Graham points out in her book The Pursuit of Happiness, “increasing levels of income—and income growth—tend to be accompanied by rising expectations and related frustrations.” Having more can make you want even more, which can lead to increasing stress and frustration and eventually to a lower level of happiness.

One of my most enduring memories as a financial planner is of an elderly gentleman with considerable wealth—more than his family could spend over several generations. Having grown up during years of unrest in Colombia, he was terrified of losing even a little bit of his money. One day I had the pleasure of hearing him reminisce about his life when he was young and in love. He and his future wife, owning virtually nothing but a beat-up motorcycle, would ride through the streets of Bogota in the summer evenings. You could almost feel the wind as he told his story, his bride of fifty years smiling beside him. He looked up at me and sighed, “We were happier then.” He truly realized that money cannot buy happiness.

A Wealthfulness mind-set helps you step off that money and happiness treadmill by forcing you to communicate your financial priorities and reassess your definition of success. My client was realizing in his eighth decade of life that it wasn’t the money or his success as an architect that mattered most. It was his life experiences with his wife, his family, and the memories of his youth in Colombia that resonated. All the money, in fact, was making him quite unhappy.

In the end, experiences create much deeper memories than material things. Friends and travel, for example, build longer-lasting memories than the new car that slowly becomes just a car. This is true partly because our memories are far more malleable than we think. Researchers have suggested that it is far easier to mold an experience than it is a material object. The experience is more subjective, more open to interpretation.

As Eisenberg wisely points out in his book, experiences are almost always less expensive and easier to come by than precious material things. He suggests, in the end, that the unexamined life is much more expensive, because those mindless material purchases never truly fill the empty void in our lives.

Conspicuous Consumption—Who’s Watching What You Buy?

If the research is correct in telling us that experiences matter more than material things, why are Americans still racing along on their hedonic treadmills—reaching for bigger houses, driving more expensive cars, and following the Kardashians on social media instead of hiking the Rockies with their kids?

Robert Frank, an economist at Cornell University, has spent decades trying to understand why people often behave in such irrational ways. Like many of the economists we’ve discussed so far, Frank has concluded that we are not the purely rational, self-interested creatures depicted in Adam Smith’s Wealth of Nations. Frank points out, for example, that we like others to see what we are consuming—i.e., we want our neighbors and friends to see where our money goes. He calls this conspicuous consumption, and it has a surprisingly large role in how we make purchasing decisions. The houses we buy, the cars we drive, and the clothes we wear are all, to some degree, bought with others in mind.

Frank’s insight regarding wealth, money and happiness is that a bigger home or a new car is conspicuous, while a longer vacation or quality time with your family is not. Your neighbors and friends may not even notice the quality time you spend with your kids, but they’re sure to notice that new BMW. Consequently, we subconsciously (or even consciously) opt for the material objects that give us only temporary happiness, rather than the experiences that enrich our lives and make them more memorable. Wouldn’t we all be better off with longer vacations and shorter commutes, rather than suffering the incessant trend toward suburban McMansions and 24/7 job stress?

Think for a moment about your most recent purchases. Have there been more material items or experiences? How conspicuous? Do you rely on brands, labels, and high prices to lend credibility to what you buy?

Interestingly, our digitally connected lives may be leading to positive changes in our conspicuous consumption. Economist Tyler Cowen points out that people are obviously emphasizing experiences, i.e., leisure, as they flock to social media to document their evenings, food, and travel. Nowadays they can instantly share those great pictures of Italy or Cancun with hundreds of Facebook friends. So maybe, just maybe, Facebook is encouraging us to connect with more people in meaningful ways—to share experiences instead of things. Of course, the ultimate goal should be to spend time with the ones you love and to ditch the idea that money can bring you happiness, not simply to have more Facebook-worthy vacations.

The Two Most Dangerous Times In Your Life—Birth and Retirement

Dan Beuttner, a National Geographic Fellow, spent years traveling the world looking for the secrets to a long, healthy life. His eventual book, Blue Zones, summarizes his findings from small communities across four continents —Europe (Sardina, Italy; Ikaria, Greece), Asia (Okinawa, Japan), South/Central America (Nicoya, Costa Rica) and North America (Loma Linda, California).

In these “blue zones,” Buettner and his team of researchers found much higher percentages of healthy adults living well into their late nineties and beyond one hundred. What were their secrets? Plant-based diets, active lifestyles, strong community ties, and a deep sense of purpose seemed to be consistent themes.

Buettner gave a summary of his research in a September 2009 TED talk. In his talk he suggests the two most dangerous times in a person’s life are when they are born and when they retire. The first year of life is obviously a very risky time for all creatures, but why is retirement also fraught with risk? It turns out that many of the characteristics Buettner found in the blue zones fade away with retirement—daily physical activity, community ties, and a sense of purpose , to name a few.

If your identity is based on your income or your job title, then retirement can be a pretty big shock to both money and happiness. You lose those work connections to people and your sense of purpose the moment your career ends. Buettner and his research team discovered one blue zone community on a small Japanese island that had a name for a life purpose—ikigai. The Japanese translation is “a sense of life worth living,” and virtually all the centenarians Buettner talked to on the island could easily explain their personal ikigai. It was part of their culture.

In a separate study of forty-three thousand Japanese adults, the participants with strongly expressed ikigai had significantly lower rates of death, particularly cardiovascular deaths, over the following seven years. It’s very important to note that ikigai is not derived from societies’ definition of purpose—power, economic or social status—but rather it is cultivated internally, uniquely by each individual.

A 2006 paper from the National Bureau of Economic Research supports Buettner’s contention that retirement is a particularly dangerous time in life. They found a strong connection between retirement and declining health. The incidence of illness increased, while mobility and mental wellness declined between 6 and 16 percent during the first few years after retirement. These negative effects turned out to be stronger when a person’s retirement was involuntary.

If you have developed deep, meaningful relationships throughout your life and beyond your career, then retirement can be just a turning point where you spend more time with friends and less time with (ex)coworkers. However, if your work has been allowed to consume your time and energy for decades, then retirement is not a turning point but rather a stopping point. In this case a person’s physical and mental activity levels can drop dramatically in a short period of time, alongside their wealth, money and happiness.

In an upcoming paper, Professor Cowen surveys a number of reasons why many of us may enjoy working—from the obvious, like status and more money, to less obvious influences, such as social, psychological, and demographic factors. According to the paper, the hours worked per person has not changed much since World War II, in spite of large changes in technology and productivity, along with smaller positive growth in personal income. We should expect people to work less as their incomes and productivity increase, yet professor Cowen points out, “One of the big lessons of economic data is that people really like work.”

Happiness, as you can see, is complicated. We know that money can’t buy you happiness; however, many factors, like social status and conspicuous consumption, are directly influenced by our income. We may continue to work just as hard as previous generations because of those external benefits, or, as Cowen suggests, we may enjoy working for a host of other reasons.

The question is not how can money buy you happiness, the question is: how can you best navigate the complicated journey of happiness? Here’s what Ben Casnocha recommends—think of your success and happiness in terms of a dashboard instead of a leaderboard. A dashboard, like the one in your car, provides lots of information about your driving experience but tells you nothing about the cars around you. Your money, wealth and happiness can be measured in the same manner, i.e., relative to the internal conditions you control. A leaderboard, on the other hand, forces you onto that hedonic treadmill or status ladder. As Casnocha tells us in his article, “you should measure yourself in the spirit of improving upon your last best record, not what an opponent has accomplished. Leaderboards turn your attention to others; dashboards turn your attention within.”

Over the years I’ve had clients who worked as practicing surgeons well into their late sixties and seventies. Earlier in the book I mentioned Peter Bernstein, an economic historian who wrote several of his most popular books well after he turned seventy. When I interviewed John Bogle in 2009, he had just turned eighty and was on his second heart transplant. At the time, he was busy working on a brief for a pending Supreme Court case, writing regular op-ed pieces for the major newspapers, and rewriting his classic book Common Sense on Mutual Funds. These people were not slowing down well into their seventies and eighties, and I believe it was due, in large part, to their happiness dashboard—their “ikigai.”

This article is excerpted with permission from Wealthfulness: Simple Steps to Financial Health and Happiness by Lance Alston.

About The Author

Lance Alston is the Founder and President of New Dimensions Wealth Management, LLC. He holds a master’s in economics from George Mason University and a Bachelor’s from The University of Texas at Austin. As the co-host of a personal finance podcast (2005-2008) he interviewed a wide range of guests from the fields of economics, finance and public policy. Alston has personally helped more than 500 families create a customized financial plan for their future during his 19-year career. Those experiences have taught him a few important lessons—uncomplicated solutions are usually best, investing costs are very important, and money isn’t everything. In his free time he enjoys traveling with his two daughters, Claire and Olivia. Learn more at: ndwealth.com/lance-alston-cfp