You've probably heard the saying, "Money can't buy you happiness." But recent research is beginning to show that it actually can, if you spend your money the right way.
Income levels and law of diminishing returns
If you make more money, will you be happier because you will be able to afford more things? Research shows this isn't true. A study conducted by Daniel Kahneman and Angus Deaton analyzed data from more than 450,000 responses to the Gallup-Sharecare Well-Being Index. They studied the happiness of people at different income levels.
At around $75,000 per year in income, the level of happiness that a person experiences levels off. Once you start earning more than $75,000 per year, there is no significant increase in a person's daily happiness. This means that a person making $1 million per year isn't going to be much happier than someone making $175,000 per year.
One theory is that material things aren't what makes you happy. Even as you increase your ability to buy more material things, it doesn't have a measurable impact on your overall happiness.
The farther below $75,000 in income, you start to see a decrease in happiness and an exponential rise in misery. The researchers speculate that this is because your stress levels increase when you are worried about things such as shelter, food, water, etc. You are worried about meeting your basic needs.
The conclusion of this study is that more money allows you to comfortably afford all of your basic survival needs, alleviating those types of stresses from your life. After you've accomplished this, you'll be left with trying to find fulfillment. Attempting to find fulfillment by purchasing materialistic things isn't going to work and it certainly won't make you happy.
So how can you use your spending to increase your happiness? There are two main ways research shows that you can do this. The first is by spending your money on experiences and the second is spending it on other people.
Spending on experiences
A study conducted by San Francisco State University found that people enjoy greater well-being from life experiences and consider them to be a better use of money. The benefit of spending your money on experiences is that they last forever.
It is so fun to reminisce with family and friends about the fun times you've had with each other. I'm sure you can think back to many events in your life that will immediately bring a smile to your face or make you laugh out loud. How many purchases will do the same? There may be some, but not many.
Spending on others
Spending on others is another way for you to create happiness for yourself. When you spend money on others, it has been shown to create a heightened state of joy that lasts longer than when you spend on yourself. The reason this happens is because you are focusing your efforts on others, which has the added benefit of providing fulfillment.
The personal value of philanthropy
Bill and Melinda Gates created a foundation where they are spending the vast majority of their time and money on trying to solve problems in order to help millions of people. If they focused all of their time buying new cars, planes, or vacation homes, they wouldn't have this grander purpose in life. Focusing your time outward and on helping others can create a sense of purpose and fulfillment, which will provide you much more long-term happiness than any material purchase.
Everyone once in a while you see headlines pop up about some super-rich celebrity who is upset or depressed with their life. The initial reaction people have is some form of outrage. They have all of this fame and fortune. They have nothing to worry about!
This is true, but if you look closer at the person's background, often times you'll see that they are focused on all of the things we have discussed that won't bring you happiness. This isn't to say that by simply starting a charitable foundation you are going to be the happiest person around. But research has shown that partaking in these endeavors will have a positive impact on your emotional well-being.
Spending your money in ways that helps others or brings them joy can bring joy to you. So if you find yourself feeling a lack of fulfillment, maybe you can turn your attention toward helping others.
(Editor's Note: This column originally appeared on Investopedia.com and has been updated to reflect that the name of the data source for the study came from the Gallup-Sharecare Well-Being Index.)
— By Jared Paul, managing director and financial planner at Capable Wealth