By Dr. James M. Dahle, WCI Founder
There is scientific, peer-reviewed literature on all kinds of subjects. One of the most interesting subjects out there to study is how to be happy. Academics have been studying this for decades, and the conclusions they have reached have important applications in your personal financial planning. In this column, we’ll examine three lessons from the happiness literature that you can apply in your financial life.
#1 The Relationship of Happiness to Income
Many people have heard the statistic that additional income beyond $75,000 per year does not increase your happiness. If you go back to the primary literature, you will find that this is not entirely true for three reasons. First, that number was not indexed to inflation. It is probably now in the low $100,000 range. Second, that number was not adjusted for high cost of living areas. It simply takes more income to have the same life in San Francisco as it does in Indianapolis. Third, the relationship between additional income and additional happiness was not flat after that $75,000 mark; it simply changed to a much lower slope. Making $200,000 a year does make you happier than making $100,000 a year but not by nearly as much as increasing your income from $50,000 to $100,000.
There are still two important personal finance lessons to take from these studies. The first is that when you have a low- to middle-class income, additional income can really have a dramatic effect on life satisfaction. Thus, you should do all you can at those income levels to boost your income. You can also help friends, family, and others at lower income levels to increase their income and financial resources through giving, mentorship, and job creation, knowing there will be a lot of bang for your buck. The second lesson is that happiness continues to rise with additional income but not nearly at the same rate. Thus, you should do what you can to increase your income, so long as what you have to do to increase that income does not make you noticeably less happy. If raising your income from $350,000 to $400,000 means asking for a raise, hiring a scribe, or lobbying for a more efficient electronic medical record, that’s probably a good thing. If it means working three additional night shifts every month, that may not be worth it.
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#2 Spend Your Money on Experiences with Those You Care About
There are a lot of ways to spend money. You can buy homes, automobiles, jewelry, clothes, handbags, airplanes, boats, and snowmobiles. You can pay for someone else to do your chores, such as home cleaning, snow removal, and lawn care. You can pay for experiences like European vacations, bottle service, heli-skiing, or eating out. Different people have different values, but as a general rule, the happiness literature is very clear on where you should spend your money to get the largest increase in happiness.
You should spend your money on shared experiences with people who you care about, such as friends, family, or a romantic partner. The additional bump in happiness that comes from buying a new thing of any kind fades just as quickly as that new car smell. But experiences help build relationships and provide great memories, both of which contribute to long-term happiness. So instead of buying that BMW, consider taking your family to Paris, Costa Rica, and your local national park this year.
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#3 Giving Money Makes You Happier
You would think that since additional income makes you happier, giving that income away to someone else would make you less happy. But that is not what the data suggests. In fact, charitable giving can make you even happier than doubling your income. Thus, every person at any level of income or assets should find a way to give something away to others—including high-quality charities—each year. Giving more frequently increases happiness.
Although it takes more work to give something each month than a larger amount once a year, it is likely worth considering for the happiness benefit alone. Even better, you do not need to give very much money to get that happiness boost. Giving even a tiny percentage of your income will make you happier. Giving anonymously without any public recognition increases happiness even more. Using a Donor Advised Fund (DAF) is a particularly powerful way to give anonymously to registered charities since it ensures the charities you give to will not spend any of your donated money lobbying you for additional donations (since the DAF doesn't give out your contact information).
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We all seek happiness in this life, and paying attention to the scientific literature on happiness can help shape your personal finance plan in a way to maximize that happiness. Boost income, purchase experiences with people you care about, and give money away in order to increase your satisfaction with life.
How else do your personal finances help you find happiness? Has making more money made you happier? Have you made other changes in your financial life to find more satisfaction? Comment below!
[This article originally appeared in the American Academy of Emergency Medicine's Common Sense magazine.]