It’s been said that money can’t buy happiness. But when you ask most people what will make them happier, they say “more money.”
So, what gives?
It turns out that more money can increase happiness after all. But how much and to what extent?
There’s an ever-growing body of research that shows that how much you earn, as well as how you view your wealth relative to others in society, can affect how satisfied you are with your situation.
So for this post, I wanted to run down five aspects of money and personal finance that research suggests can have a positive impact on your life.
#1. Increasing Your Income — Up to a Point
For most people, making more money leads to more happiness. However, once you get to a certain level of income, increases no longer have the same impact.
The income level to aim for — the point at which further increases would have diminishing returns — varies by geographic location. One study out of Princeton pegs that level of income at $75,000. In New York, the number rises to $99,150, whereas in Mississippi it’s $65,850.
The reasoning behind that is pretty simple: we buy the important stuff first. Someone earning $75,000 per year is probably well-fed, lives somewhere safe, and has at least a little bit of discretionary spending.
As Bill Gates said, once you reach a certain point of wealth the hamburgers all taste the same…
#2. Don’t Stop at $75,000, If…
The same study suggests that some people will continue to see an increase in happiness as their income rises above $75,000. To understand why, think about happiness as a combination of your day-to-day mood and how you feel about yourself.
For some, increasing income above $75,000 improves how they feel about themselves — particularly when they’re around other people who make well above that figure.
On one hand, this depends largely on how we evaluate what it means to be “successful.” If your career performance is strongly linked to earnings — for example, if you’re a business owner or salesperson — then your income is directly tied to your sense of professional accomplishment.
But beyond that, it’s also a function of wealth being a relative concept. If you’re a lowly millionaire who lives on the same street as Bill Gates, Jeff Bezos and Elon Musk, you’re going to view your wealth differently than if you live in a small town where you’re the richest person by a mile.
#3. Make Financial Decisions to Optimize For Autonomy and Leisure
Fortunately, the two points listed above don’t give workaholics an excuse to keep their nose to the grindstone. That’s because aside from income, two of the main predictors of happiness are leisure and self-control.
If you sacrifice either of those in a quest for higher and higher income, your overall happiness will decrease.
That’s why thinking about what you value most in life should be a central aspect of your career planning. Some people value the structure that a regular 9-5 job provides, but for others, ceding so much control of their schedule to an employer feels like being under house arrest.
If you fall into the latter category, think about how to get to that $75K mark through less traditional means, like freelancing.
What’s also important to understand is that both leisure and self-control increase with the more money you’re able to save. That’s because having a sufficient cushion gives you the freedom to act on opportunities that arise — like moving across the country to take a job you love, or seizing the chance to start your own business.
Decisions like these are much riskier when you’re living paycheck to paycheck.
Related: How to break out of the paycheck-to-paycheck cycle.
#4. There Are Easier Ways to Increase Happiness Than Increasing Your Income
When it comes to increasing your happiness, there are far larger factors than money. We touched on two of the primary ones above, but there are countless others.
For example, one study showed that doubling your number of friends has the same impact on happiness as a 50% increase in income.
Another study found that improving your health from “3” to “4” on a five-point scale has the same impact on happiness as a 6,531% increase in income!
#5. Emergency Funds and Savings Raise the Happiness Floor
We all know that in life, difficult times are inevitable. From a car breaking down, to the loss of a job, to a serious injury or the death of a loved one — we all have to deal with unexpected setbacks.
Saving money has been proven to increase your resiliency when these hard times hit.
That’s part of why it’s so important to get out of debt, build your emergency fund and save more money. Each of these three actions will help you better weather life’s storms, in turn helping you avoid the financial stress that can lead to disillusionment, dissatisfaction, and even depression.
Can Money Buy Happiness? Helpful Resources
Here are two great resources that are easier to digest than some of the academic studies linked to in this article:
Science has provided great insight into how money affects happiness. Having this knowledge is a great starting point for determining your financial goals.
But there’s a lot more to setting financial goals and priorities that bring you joy. That’s why I created a free workbook titled “How To Set Financial Goals That Actually Make You Happy.“
This step-by-step process will set you up to optimize your financial goals for greater fulfillment and purpose in life. Just enter your name and email address below and I’ll send you the workbook immediately.