Can Money Buy Happiness? Sort Of.

“Wealth is the ability to fully experience life.” – Henry David Thoreau

In your Psych 100 class, you were likely introduced to the concept of “operationalization”, where one concrete variable serves as proxy for a fuzzier, harder to measure construct. It is no secret that for many, the amount of wealth they have amassed serves as shorthand for happiness, but such is hardly the case. While wealth is positively correlated with wellbeing to a point, disconnecting money from purpose is a formula for emotional bankruptcy. One such self-delusional variant of chasing money for happiness is the “I’ll stop ignoring my happiness when I reach xyz number.” Your magic number may be a salary or it may be a wished for dollar amount to have in the bank. Whatever it is, I can promise you that when you get there, it won’t seem like enough. You see, we are not conditioned to think of money in terms of “enough.” As one of my clients once said to me, “Doc, you can never be too rich or too skinny.”

The scientific name for this phenomenon is the “hedonic treadmill” or “hedonic adaptation,” referring to the fact that we must make more and more money to keep our level of happiness in the same place. What tends to happen is that our expectations rise and fall with our earnings (as well as other circumstances in our life), keeping our happiness at a relatively stable place. To demonstrate this effect, I’d like for you to consider two groups that seemingly have little in common – paraplegics and lottery winners.

Suppose I asked you, “Which would make you happier, winning the lottery or being in a crippling accident?” Not too tough, right? So, we would hypothesize that one-year after the life-changing event, lottery winners would be much happier and paraplegics would be much sadder. But this is simply not the case. One year after their respective events, it makes little difference whether you are riding in a Bentley or a wheelchair – happiness levels remain relatively static.

Why? We tend to overpredict the impact of external events on our happiness. One year later, paraplegics have found out their accidents were not as catastrophic as they may have feared and have coped accordingly. Similarly, lottery winners have found out that having money brings with it a variety of complications. No amount of spending can take away some of the tough things life throws at each and every one of us. As the saying goes, “wherever you go, there you are.” In much the same way, we tend to project forward to a hypothesized happier time, when we have more money in the bank or are making a bigger salary. The fact of the matter is, when that day arrives, we are unlikely to recognize it and will simply project forward once again, hoping in vain that something outside of ourselves will come and make it all better.

A recent Princeton study set out to answer the age-old question, “Can money buy happiness?” Their answer? Sort of. Researchers found that making little money did not cause sadness in and of itself but it did tend to heighten and exacerbate existing worries. For instance, among people who were divorced, 51% of those who made less than a thousand dollars a month reported having felt sad or stressed the previous day, whereas that number fell to 24% among those earning more than three thousand dollars a month. Having more money seems to provide those undergoing adversity with greater security and resources for dealing with their troubles. However, the researchers found that this effect (mitigating the impact of difficulty) largely disappears at seventy-five thousand dollars.

For those making more than seventy-five thousand dollars a year, individual differences have much more to do with happiness than does money. While the study does not make any specific inferences as to why seventy-five thousand dollars is the magic number, I’d like to take a stab at it. Most families making seventy-five thousand dollars a year have enough to live in a safe home, attend quality schools, and have appropriate leisure time. Once these basic needs are met, quality of life has less to do with buying happiness and more to do with individual attitudes. After all, someone who makes seven hundred and fifty thousand dollars can buy a faster car than someone who makes seventy-five thousand dollars, but his or her ability to get from point A to point B is not substantially improved. Once we have our basic financial needs met, the rest is up to us. Hard work provides the means but we must find our meaning.

So if happiness does not come from hitting the lottery and sadness is not borne of personal tragedy, what does make us happy? Well, fortunately or unfortunately (depending on how well-adjusted your parents are), a great deal of happiness comes from our “hedonic set point,” which is genetically determined. A ten-year, longitudinal study of 1,093 identical twins found that between 44% and 52% of subjective wellbeing is accounted for by genetic factors. So, roughly half of what makes you happy is out of your control I’m sorry to say.

Of the remaining 50%, roughly 10% is due to external circumstances and a whopping 40% is due to intentional activities, or the choices we make and the purpose we create. We discussed before how we tend to overrate the importance of the things that happen to us, and sure enough, only 10% of what makes us happy is accounted for by lucky and unlucky breaks. Eighty percent of the non-genetic components of happiness can be controlled by our attitude and by making choices that are consistent with finding true joy. The first step in this pursuit is ensuring that the goals we are setting for ourselves are consistent with finding true happiness.

If 80% of the happiness that is in our control comes from setting and working toward positive goals, what sort of goals should we be setting? Headey has found that goals focused on enriching relationships and social resources are likely to increase wellbeing. We connect with a number of close friends and find joy within those relationships. On the other hand, he found that goals based around monetary achievement have a negative effect on overall wellbeing. Unlike friendship, which we “consume” in limited but satisfying quantities, we feel as though we can never really reach a financial goal. Having a core group of close friends sates us; it is sufficient to meet our social needs and we do not pine for ever-greater numbers of friends. Not so with financial goals; just as we reach our former goal, the hedonic treadmill kicks in and our excitement over having “arrived” is gone in an instant. Dr. Daniel Gilbert, a happiness expert at Harvard, says that pursuing wealth at the expense of more satisfying goals has a high opportunity cost. “When people spend their effort pursuing material goods in the belief that they will bring happiness, they’re ignoring other, more effective routes to happiness.” The simple fact is this: chasing money and material goods is an itch that our flawed psychology will never let us scratch, unless we can define our financial goals in terms of the personal ends they will meet.

In a money-obsessed world that has socialized us to chase the almighty dollar, it can be weirdly unsettling to learn that money isn’t everything. As much as we whine about money, having something that is the physical embodiment of happiness is nice. We can hold it, save it, get more of it, all while mistakenly thinking that getting paid is how we “arrive.” Realizing that money does not directly equate to meaning can leave us with a sense of groundlessness, but once we’ve stripped away that faulty foundation, we are able to replace it with things that lead to less evanescent feelings of happiness. Breaking your overreliance on money as a substitute for real joy is a great first step, a second step is learning to spend your wealth in ways that matter.

Lest we swing from the extreme of “money is the only good” to the opposite extreme of “money is no good”, it is worth noting that there are ways in which money can be spent to improve happiness. A lot of our troubles with money stem from the way we spend it, thinking that buying “things” will make us happy. We engage in retail therapy, which is quickly followed by feelings of regret at being overextended. Before we know it, we’re surrounded the relics of our discontent; the things we bought to be happy become constant reminders that we’re not. Instead of amassing a museum of junk, spend your money on things of real value. Spend a little more on quality, healthy food and take the time to savor your new purchases. Use your money to invest in a dream – pay yourself to take a little time off and write that novel about which you’ve always dreamt. Give charitably and experience the joy of watching those less fortunate benefit from your wealth. A growing body of research suggests that the most important way in which money makes us happy is when we give it away. Finally, spend money on having special experiences with your loved ones. It’s true that money doesn’t directly buy happiness, but it can do a great deal to facilitate it if you approach it correctly.

If you enjoyed this piece on the psychology of money, please consider purchasing my new book, THE LAWS OF WEALTH, for 300 pages of behavioral finance goodness. 




Why Do We Hate to Talk About Money?

If you’re ever having trouble sleeping, spend some time researching financial goal setting online and you’re sure to be snoozing in no time. It’s not that advice you’ll find is bad per se, it’s just that it is fundamentally disconnected from an understanding of how people behave. Most resources will give you some great meat and potatoes stuff about setting specific, attainable and timely goals. You will nod your head, go home, and forget all about it, doing what you’ve always done before. But saying that talking about financial goals is “boring” fails to account for some of the deeper reasons why we may be averse to personalizing the investment and financial planning process. There are at least three significant reasons why we are loathe to talk about our personal financial goals: it can be stress-inducing, we dislike numbers, and it is socially taboo. Let’s examine each of these in further detail below.


A 2004 survey conducted by the American Psychological Association says that 73% of Americans name money as the number one factor that affects their stress level. Number one. The New York Times reports that couples who reported disagreeing about finance once a week were over 30 percent more likely to get divorced than couples who reported disagreements a few times a month. So, in addition to being stress-inducing public enemy number one, money is also highly implicated in whether or not we stay married. No wonder we tread lightly!

There are a couple of ways in which we attempt to manage the anxiety brought about by financial concerns, neither of which ultimately helps our cause. First, we may ignore them entirely and fail to set any specific financial goals. After all, we erroneously suppose, “if I ignore it maybe it will go away.” As anyone who has ever put off a project can attest, it never goes away and anxiety is only compounded as a deadline approaches. In college this may have been as inconsequential as pulling an all-nighter and receiving a subpar grade. In our financial lives, ignoring appropriate planning and financial goal setting can have far more damning consequences.


Computer scientist Dougla Hofstadter first originated the term “innumeracy” which he defines as “a person’s inability to make sense of the numbers that run their lives.” Notice that Mr. Hofstadter is not advocating that each of us understand math at his level or that each of us strive to be a mathematician. Rather, he suggests that there is level of facility with math that is required to successfully navigate the tasks of daily living, including planning for a personal financial future. Just as one can benefit from literacy without aspiring to be Faulkner, one can benefit from numeracy without aspiring to be Einstein.

While illiteracy primarily impacts low socio-economic status individuals in the US, innumeracy is far more widespread and impacts a greater percentage of middle class and even upper middle class people. The United States, the biggest economic engine in the world, lags behind in math. The US ranked 11th in fourth grade math and 9th in eighth grade math in the most recent “Trends in International Mathematics and Science Study" with only 7 percent of US students reaching the “advanced” level, compared to 48 percent in Singapore. Myriad studies have shown that the tendency toward socializing girls away from math and science is especially pronounced. They are, formally and informally, taught that science and math are the purview of boys and men, and as a result show decreasing interest and scores beginning in early middle school.

Whatever the sociological or educational roots of our distaste for numbers, the impact of innumeracy on our ability to create meaningful financial goals cannot be overstated. We avoid what we don’t understand, instead falling back on what we are fed by the financial news outlets, who often care more about sensationalism than substance. After all, their motive is to sell ad space, not give you meaningful data from which to build a financial roadmap.


One needn’t look any further than the most recent Presidential election to witness the sloughing off of some historical conversational taboos. In the not too distant past, topics such as race, religion and politics would have been considered impolite. In an era of increasing transparency and acceptance, however, old mores are being replaced by new standards.  But despite our increased fluency in the language of what once was verboten, one topic remains touchy and awkward, especially within families. Indeed, in an era when sex is discussed freely on the nightly news, we still don’t know how to talk to one another about money. If you demand further proof of the matter, remember that some organizations legally compel their employees to keep quiet about their salary at the risk of losing their jobs.

A recent study by the American Institute of CPAs found that speaking to children about money to children was among parents’ lowest priorities. In fact, money issues were trumped by good manners, sound eating habits, the need for good grades, the dangers of drugs and the risks of smoking in terms of perceived importance. Our reticence to talk about money is certainly not out of lack of need. An Accenture report states that Baby Boomers will leave $30 trillion to their children in the next 30 years. This doesn’t even take into account the almost $12 trillion that MetLife predicts that Boomers will receive from their parents. The fact is, money will be changing hands within families at an unprecedented rate in the years to come and we are ill equipped to make the exchange.

There are a number of reasons why talking about money may be so difficult. One is that there has been a vitriolic reaction against the wealthy in the wake of the Occupy movement and the global financial crisis. This sentiment was illustrated quite vividly in the September 24 Fortune magazine cover article, “Is It Still OK To Be Rich In America?” Another reason for this taboo may have a higher source.

By my count, the Bible, the best-selling book of all time and a foundational text for a majority of Americans, mentions money no less than 250 times. While not all Biblical references to money are negative, there are certainly enough references to “filthy lucre” to give pause. Not to mention verses such as Matthew 19:24 that says, “And again I say unto you, It is easier for a camel to go through the eye of a needle, than for a rich man to enter into the kingdom of God.” To a nation founded on Protestant ideals about work and morality, the notion of wealth as potentially corrosive is one that is deeply embedded in the collective American consciousness. But social taboos around money are not strictly religious. Sigmund Freud, an avowed atheist, identified money with feces and connected it with an anal retentive personality.

Dr. Richard Trachtman, a psychotherapist and money counselor has some fascinating thoughts on his blog,, that center on wealth as it relates to another social taboo: sex. Trachtman observes that in some ways, money is very much a part of our social every day. We commiserate with our friends about not having enough money, we let out collective groans about the burdens of taxes and dream together about how to spend fictional lottery winnings. But in terms of the more quotidian, serious matters that form the basis of our actual financial lives, we are conditioned toward silence. As Trachtman says of the sex vs. money taboo, “It is rare for a couple to marry without having had at least some sexual contact, but it is not rare at all for couples to marry without discussing financial matters.”

John Levy, a counselor to people who have recently inherited money found the following reasons for the money taboo among his clientele (as cited in O’Neil, 1993):


·      Good taste – “It’s just not done.”

·      Fear of manipulation – “It will give them power over me.”

·      Concern for spoiling children – “They will never make anything of themselves.”

·      Embarrassment – “I don’t deserve to be so much better off than others.”

·      Fear of being judged – “All they can see is my money.”

Whatever the causes of our awkwardness around conversations about money, an increased dialogue around the subject is a necessity. Passing on wealth to subsequent generations will only be as productive as they are well educated. Without the proper financial grounding, they may be ill equipped to handle their newfound assets and may actually do themselves harm with what ought to have been a great gift.

Perhaps some of the reasons above are resonant with your personal situation and perhaps not, but it seems difficult to deny that money is a subject that puts us all on eggshells. Consider a handful of your best friends. No doubt you could tell me much about their lives; joys and struggles, highs and lows. But I doubt if you could tell me their exact salary, savings or other relevant financial indicators, because we simply don’t talk about them. While this is fine in polite company, this tendency toward silence can extend beyond the cocktail party circuit. When we bring this same shame to our personal planning lives, we tend not to take a deep look at our own goals and motivations and instead tend to become enthralled in the larger financial conversation, which may have very little to do with our own circumstances at all. 

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