Four crucial lessons on the link between wealth and Happiness

You want to earn more money. It’s not a crime. Everyone wants a little more cash. The question is, why do you want more money? Is it to cover an unexpected expense or buy a bigger house, fancier car, luxury vacation, or fabulous new outfit. Whatever your answer is, what you want is not the thing you hope to buy. What you really want is to be happier, and you think more money will make it possible for you to buy your way to satisfaction. But is that true? Let’s take a look at what science has to say about wealth and happiness.

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Income and Happiness are Correlated, But Not the Way You May Think

It is true that people who have more money report higher levels of happiness and satisfaction with their lives. That should not come as a surprise. Having money brings the peace of mind of being able to deal with unexpected expenses and the added security that comes from living in a better neighborhood. And more money brings more opportunities to acquire and enjoy luxuries, higher status, and all the good things in life.

That all sounds pretty convincing so far, but there are two significant caveats.

Money only brings a certain kind of happiness. It turns out that if you call up people from various economic strata at random times of the day and ask them how happy they are in that particular moment, wealthy people don’t report being any happier. Wealth may make us feel better about our lives when we look at them as a whole, but it has a negligible impact on our moment-to-moment level of happiness. In other words, rich people may feel better about their lives overall and what they have accomplished and acquired, but they are not any happier in a day-to-day or moment-to-moment way.

The second caveat is that those studying happiness and wealth assume that increased wealth leads to increased happiness, but is that true? Although money can buy happiness, it is also true that happiness can improve someone’s earning potential. Research has shown the happier people are better at making money than their gloomier peers. So it may be that wealthy people started out happier, which is part of what led to their success.

The Link Between Money and Happiest is Strongest Amongst the Poor

Money makes people happiest when it lifts them out of poverty. It is hard to be satisfied when your basic needs for adequate food, healthcare, shelter, and security are not met. For people at the poorest end of the spectrum, even a modest increase in income can make a big difference in their lives and their happiness. But the benefit of more money drops off rapidly once people rise above the level of poverty. Why should that be?

It appears that other negatives may offset the benefits of wealth. High-paying jobs often come with increased time pressure, long hours, and more stress which may counterbalance the benefits of a fatter paycheck. After all, that fancy home theater isn’t so much fun when you find yourself working late to pay for it rather than enjoying it. Another disadvantage that comes with the ability to buy the finer and more expensive things in life is that it diminishes the ability to enjoy life’s little pleasures. Being richer may make you appreciate things you love today less in the future.

The Link Between Wealth and Happiness is Strongest When we Look at Nations

People who live in wealthy nations are far happier than people who live in developing nations. This disparity should not be a big surprise as we have already seen that it’s hard to be satisfied when you are in poverty. However, there is one huge caveat to this finding: wealthier nations tend to be characterized by democracy, freedom, and equal rights. They also tend to be more politically stable, governed by law, and suffer less graft and corruption. So it is not clear if wealth makes people happier or if a better political system leads to both wealth and happiness. An issue made even less clear by our final finding.

As the Wealth of Nations Rises, the Happiness of its Citizens does Not

The average income in America has tripled, yet the average happiness of American citizens has not improved. This phenomenon has been demonstrated in other countries as well and is known as the Easterling Paradox. Why should this be true? Two reasons, first as incomes rise so to do expectations. In the 1950s, the American dream was a house in the suburbs with two American-made cars in the garage. But now people feel like they aren’t keeping up if the house doesn’t have three bathrooms and the cars are not imported.

The second reason rising incomes do not translate into more happiness is social comparison. As your income increases, so do to earnings of the people around you. The result is that you don’t feel any richer compared to your cohort. It turns out that we don’t measure our wealth in absolute values, but instead see it in relative terms by comparing ourselves to those around us. Although we should feel good about increasing our earning by $10,000 because we can buy more, we actually will feel bad if we know our coworker gets $15,000.

Conclusion

It turns out the connection between more money and more happiness is not as straightforward as you may think. I don’t mean to disparage how much difference it can make for people living below the poverty line. Even a modest boost in income can dramatically improve happiness and life satisfaction for people living in poverty. But once you rise out of poverty, you see diminishing returns from your increasing income. Wealth brings negatives in terms of time pressure, stress, and long hours that diminish how much you enjoy life and can rob you of the ability to enjoy the small things that once brought you joy.

So now knowing that having more is no guarantee of happiness, is it possible that those who insist that living with less is more are right? I will explore the science behind that topic in my next article.

Additional Articles in this Series on Money and Happiness;

4 Science-backed Ways Living with Less can be More

Five Ways to Gain the Most Happiness From Your Money

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