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How to Buy Happiness

In Amy Hamilton Chadwick’s first story in a monthly series, we discover if more money = more happiness.

28 March 2023

“Money can’t buy you happiness, but it can buy you a yacht big enough to pull up right alongside it,” said David Lee Roth.

He might have been joking, but it’s easy to imagine that owning a superyacht would make you happier. It’s feels like it would be impossible to be rich and miserable, when it seems like money can solve so many of our problems.

But after a certain point, more money doesn’t increase your life satisfaction and happiness. Why is it that more money doesn’t just keep making us happier?

Well, sometimes it does…

Can’t pay your basic costs of living? That’s extremely stressful. Worrying about every utilities bill or groceries shop will quickly undermine your quality of life. When you’re in that situation, more money will make you significantly happier and healthier, because it removes a chronic cause of stress in your life. Poverty undermines happiness.

Once you have enough to be able to comfortably afford your expenses, the money-happiness upward trend starts to level out. There’s a diminishing return from every pay increase once you’re no longer living payday-to-payday. Your happiness still goes up a bit as you earn more, but it’s not as dramatic as you might imagine.

It feels like more money will make us happier

More money should make us happier. In theory, it can eliminate stressful tasks, help us worry less about the future, and allow us to buy all the items we want for our dream lifestyle. But earning more money doesn’t make us as happy as we imagine it will, for these four main reasons.

1. We’re bad at predicting how we’ll feel in the future

Your imagination is great at coming up with dramatic scenarios, but it’s not good at accurately predicting how you’ll feel about something in the future.

Positive events often feel less good than we expect them to, because we only imagine the lying-on-the-beach part of the holiday and forget about the queuing-in-the-airport part. We picture ourselves in a bigger house, glossing over the extra mortgage payments, maintenance and cleaning involved.

As a result, we don’t always make money decisions that genuinely boost our long-term happiness.

2. We quickly return to our happiness baseline

Instead of investing in our own happiness, we often buy items only lift our life satisfaction for a short period of time.

We adapt rapidly to even very expensive changes in our lifestyle, so that they no longer boost our overall happiness. Bigger houses, better cars and nicer clothes are all expensive ways to get a quick buzz, but we soon return to our happiness baseline.

This is what’s known as the hedonic treadmill. Your lifestyle improves but your happiness remains the same, so you’re running as fast as you can but getting nowhere.

You can spend money to optimise your long-term happiness, but it’s almost never on high-status goods or a bigger, nicer house.

3. Comparison is the thief of joy

It feels bad to compare yourself to others and fall short – but we can’t help it. We look at our fittest friend and feel unfit, look at our most attractive friend and feel ugly, and look at our richest friend and feel skint. Social media makes the problem worse by giving us a wider range of higher-achieving friends to compare ourselves to.

This influences us to spend on “positional goods”, things that cost more just because they position us as higher-status than someone without them. Limited edition sneakers, luxury handbags, new phones - anything where you pay more for the brand name.

4. Money can only buy things that have a price tag

Some of the biggest predictors of happiness are things that cannot be bought: strong relationships, good health and a supportive network of friends. They have no price tag, but without them it is much harder to be happy.

How should you spend your money for optimal happiness?

What can you spend your money on that gives you the best chance of optimising your long-term happiness? You can buy time, buy small joys, invest in yourself, spend more on relationships and spend more on prosocial spending.

This year I’m going write each month on what research tells us about money and happiness, so you can use that information to inform your spending decisions. Because life is too short to just pull up next to happiness ­– let the superyacht owners envy you for a change.

Informed Investor's content comes from sources that Informed Investor magazine considers accurate, but we do not guarantee its accuracy. Charts in Informed Investor are visually indicative, not exact. The content of Informed Investor is intended as general information only, and you use it at your own risk.


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