Can money buy happiness? Yes and No.

Go out on the street and ask people if money can buy happiness and you will hear a variety of answers. Peoples’ first instinct is yes, of course it can buy happiness. In addition to being able to buy the things you need, like food and shelter, money can be spent on cool gadgets, premier food experiences, fancy clothes, and other luxuries we desire. Do you want the new iPhone? I certainly do. Spending money makes our lives easier, raises our social status, and gets us things that we want. It’s a logical conclusion that money therefore makes us happier. However, when we consider the psychology behind spending, we reach a different conclusion.

Money does not make us happier after our basic needs are met

Conversely, some schools of thought suggest that more money only makes us happier up to a specific amount. A recent study from Purdue University (2018) suggests that once your income reaches $105K, more money does not increase your happiness (single household, not adjusted for locality). For many people, increasing their income means trading already limited free time for even more work hours.  This tradeoff can lead to an obvious decrease in happiness - just talk to a first year investment banker shouldering 90 hour work weeks. For others, however, happiness stagnates from a focus on materialistic spending. Though additional income can be used to buy an even bigger house with more space for even more purchases, more stuff does not equal more happiness.

Luxury spending does not increase our happiness in the long term

The “Hedonic Treadmill” theory explains how happiness does not increase from continually buying new things. In a nutshell, the theory says that people have a natural happiness level that we always return to. This is equivalent to how we remain in place on a treadmill, no matter how many steps we take. For example, when you buy the latest smartphone, the phone makes you happier than your previous phone for the first several days, or even weeks, but eventually, your attitude towards your new phone reverts to the same happiness you got from your older phone. Similarly, when you make more money, you may start going to Michelin star  restaurants; however it won’t make you much happier than going to the more-affordable hole-in-the-wall you used to love. Invariably, we are driven to purchase more and more luxury items to keep up socially and for the ephemeral happiness “high” that lasts a day or two. However, the increase in spending on luxury goods does not necessarily make us happier in the long term.

Luxury spending risks significant unhappiness

The worst kind of luxury spending is that which comes at the expense of the ability to afford basic needs. This behavior is prolific in our society where marketing convinces us we need a certain luxury and credit cards enable us to buy things we risk not being able to afford. Consider a person that has no savings (most of America) and puts $800 on a credit card to buy a new smartphone. That person is then blindsided by a lay-off. If that person can’t find a better or comparable job ASAP, they won’t be able to pay for rent or food, let alone their credit card debt of $800. Missing just a week or two of income causes creates missed payments and allows credit card debt to spiral out of control, spawning unhappiness for a very long time. Given the marginal nature of materialistic happiness, the risk is not worth the reward. Financial risk can be overcome with an adequate emergency savings fund or insurance. Unfortunately, many Americans have neither and get trapped in debt.  

Thinking about dollar per happiness can optimize our happiness derived from spending

For those readers that are not trying to found a start-up and make enough income to afford luxuries, you may be able to increase the happiness gained through your spending. Though happiness cannot be measured empirically, there is an inherent ability in us to approximate happiness per dollar calculations. If you look through your receipts or think about your recent purchases, you will quickly come up with some items that had significantly lower happiness per dollar ratios. The lower happiness per dollar purchases may be impulse buys, online shopping sprees, or purchases forced through an awkward social situation. These purchases should all be eliminated from your life and redirected towards something that makes you happier.

Financial short-sightedness distracts us from long term goals and happiness

When you think about happiness, you may find that you want to save up for something truly remarkable, like getting a specialized education, switching careers for something you enjoy more, starting your own business, or retiring early. All these goals are great but can be expensive and require long-term planning and frugal spending behaviors. I spoke with someone recently who said that they spend $10k a month and they have no idea where it goes… it just gets spent. If you examine your own spending habits, you will similarly realize that there is a discretionary amount of money you spend on non-essentials every month that is unmemorable, such as a subscription you never use or a fancy coffee every day. For many, if you convert that unmemorable spending into investment, you can achieve your long-term goals that will invariably make you happier.

Shameless Plug: Our app instills spending behaviors to hedge against unhappiness

First and foremost we teach children that they should spend their money on needs before beginning to spend on wants. We also coach to differentiate between needs vs wants by prompting classification whenever users are making a withdrawal. We encourage parents to do similar coaching in-person. After years of practice through our app, your children will continue to ask the question “is this a need or a want?” when they become adults and be better prepared to acknowledge spending situations that have low happiness to dollar ratios. For the older ages, we will prepare your child to think about risk in their financial decisions through games and practical exercises so that they are smart about mitigating financial risks (currently in our development pipeline).

Shameless Plug: Our app helps your child think with a long-term view towards finance

Too often we think about our finances in terms of this week or this month, reflected nationally by the overwhelming number of Americans living paycheck to paycheck. Children are the same and may be even more short-sighted than adults when it comes to spending. They want everything now, even if delaying gratification has double the rewards (see the Stanford Marshmallow experiment). Our last-year, this-year, next-year interface encourages users to take a long-term and forward-looking view towards finance rather than this week/next week. Furthermore, we encourage delayed gratification through higher interest rates (parent funded) and annual reports that emphasize long-term effects of discretionary spending trends. Our interface and features will help evoke long-term thinking and behaviors that your children will take with them into adulthood.

Thoughts or comments?

We would love to hear them below in the comments section. Make sure to sign your family up for our app!