'To be happy, buy this' says Science

You’re smart. Successful. You’re a consistent saver and an intelligent investor. But are you happy?

We’re all told as children that money doesn’t buy happiness, but to some extent that’s a lie. In fact, studies have found that wealth is significantly correlated with subjective well-being – but only up to a point.

In 2010, a Princeton study by Daniel Kahneman and Angus Deaton found that earning more than US$75,000 per year won't significantly increase your day-to-day happiness.

But don’t worry. The fact that your financial achievement no longer fills you with undiluted pleasure may just mean one thing – you’re spending it wrong. 

Most of us make the seemingly logical assumption that as material things last longer than one-time experiences, they should also make us happier for longer. A weekend getaway, we reason, is only good for a few days. A new TV, however, will give us years of enjoyment.

But we have it backwards. That material goods are ever-present actually dilutes their ability to make us happy over the long term because we adapt and they fade into a ‘new normal’. A 1978 study found that even lottery winners get used to their new wealth and eventually revert back to their pre-win level of happiness.

However, a 2014 study by Thomas Gilovich found that spending money on experiences, rather than goods, provides a much greater and longer lasting sense of well-being.

The reason, Gilovich concluded, is that: “(1) Experiential purchases enhance social relations more readily than material goods; (2) Experiential purchases form a bigger part of a person’s identity; and (3) Experiential purchases are evaluated more on their own terms and evoke fewer social comparisons than material purchases.” That is, buying 'stuff' encourages you to keep up with the Joneses.

Perhaps more interesting, though, if you really want to squeeze the most happiness from your money, it may be wiser to spend it on someone else entirely.

In 2013, researchers at Harvard University approached people on campus and gave them either $5 or $20 and told them to spend it by the end of the day. Half the participants were asked to spend it on themselves; the other half were told to spend it on someone else.

When asked what would make them happiest, most participants predicted that spending more money ($20 vs $5) and spending it on themselves would do more for them than giving it away.

However, when the researchers checked up on their subjects that evening, those who had spent the money on someone else or donated it to the homeless reported feeling significantly better. 

But there’s a final twist: no difference in mood was found between those who spent $5 or $20 – which reinforces the idea that it isn’t how much money you have to spend, but how you spend it, that has the biggest effect on your happiness.

To get more insights, stock research and BUY recommendations, take a 15 day free trial of Intelligent Investor now.