Dear Readers, although my weekly columns are usually about the everyday practical side of managing money, to me there’s also a philosophical side to money decisions. So every once in a while I think it’s good to take a step back and put money in the larger context of your life. Because while we all like to quantify money concerns — how much or how little we have, what we earn, what we save — there’s also a personal, emotional side to how money affects our lives.
This was brought home to me once again as I recently listened to behavioral economist Dan Ariely discuss the relationship between money and happiness. This is certainly not a new topic — many of Ariely’s colleagues have done extensive studies on the subject — but he made some very clear points that I think are worth exploring.
More doesn’t necessarily mean happier
It’s an old theme that money itself doesn’t buy happiness. You can have all the money in the world and still be miserable. Of course on the flip side, if you’re always struggling to pay the bills, it’s harder to enjoy life.
But once the basics are covered and you feel pretty secure in your ability to handle your financial obligations, does accumulating more money make you measurably happier? In other words, how much is enough?
There’s been a lot of research on the subject. One 2010 Princeton University study suggests that after you reach an income of around $75,000, more money doesn’t translate into improved emotional well-being. Other research indicates that our happiness may be more tied to our sense of relative wealth (having more money than our peers or neighbors) than it is to a particular income. In either case, just having more money doesn’t equate to being happier.
This doesn’t in any way mean you shouldn’t have your own financial goals and strive to meet them. It just means being realistic about what effect the added zeros on your paycheck or your bank account will actually have on your life.
How you spend is more important than how much you have
Behavioral economists make a strong point that spending money on experience is ultimately more rewarding than spending on things. I was talking to a friend about this recently and she shared that her mother never valued traveling because, in her words, “what did you have to show for it?” My friend’s mother much preferred to spend money on something tangible.
But according to Ariely, the happiness we derive from an object such as a new car or new piece of furniture is short-lived. That’s because we quickly become accustomed to the new thing. With an experience such as a great vacation, the pleasure is longer lasting because the memories stay with us and may actually change the way we think about our life. While the new thing becomes old quickly, we get to relive and reflect on the experience for years to come.
To me it comes down to spending according to your values. As I stressed recently in my LinkedIn series of articles on the Financial Cleanse, it’s not only important to monitor how much you spend, but also how you spend it. I believe that thinking about what you really value — as well as what you can afford — and spending accordingly will make you happiest.
Give it away to get it back
I’ve long been a big believer in philanthropy, whether you give of your money or your time. You may have heard that the concept of prosocial spending — spending money for the benefit of others — brings greater happiness no matter how much or how little you have. A study on giving published by Harvard University makes this point and found that even toddlers were happier when they gave away their treats than when they received them. I like the prosocial spending idea and I believe it’s one that we all should incorporate into our own money plans.
If you Google “money and happiness,” you’ll find myriad articles and research corroborating these three points. But the bottom line is that while money is a necessary part of our lives, no matter who we are or how much we have, it’s how we think about money, how we spend it and share it that may determine whether or not it makes us happy.
Carrie Schwab-Pomerantz, CERTIFIED FINANCIAL PLANNER ™ is president of the Charles Schwab Foundation and author of “It Pays to Talk.” You can e-mail Carrie at askcarrie@schwab. com.