How to Use Money to Increase Happiness

Is there a link between money and happiness?

It’s an age-old question, and we often focus on the amount of money we make and how that relates to happiness. But what’s often overlooked is how we spend and allocate our money. The choices we make with our money are a critical piece in determining how happy (or not) money makes us.

Let’s break down four key pillars of money — saving, spending, debt, and giving — and how they all relate to happiness.

1. Saving Money and Happiness

A 2013 survey from Ally Bank surveyed 1,025 American adults and found that those with a savings account reported higher levels of happiness than those without a savings account. The survey also found that those with more savings were more likely to be “very happy” than those with lower amounts of money saved.

Put another way, having a system in place to save and invest money seems to contribute to a greater sense of security, flexibility, and overall wellbeing. Having (and building) a financial safety net is more than good practice; it leads to higher levels of happiness.

2. Spending Money and Happiness

Here at The Vantage, we’re all about planning and saving for the long term. However, how we spend our money is just as important as how we save and invest money.

A 2014 psychology study at SF State examined how people compare spending money on experiences (vacations, trips, outings…) versus material things (a car, furniture, and so forth). Going into the study, people thought experiences would make them happier but that the material things were a better value. This is the type of reasoning that goes on inside our heads: “That beach vacation sounds amazing, but I’ll get more bang for my buck buying a new TV instead.”

However, the study found that the people who did indeed spend money on experiences were both happier and rated it as a better use of their money, compared to the people who bought a material item. Here is what Ryan Howell, SF State Associate Professor of Psychology and co-author of the study, told the Wall Street Journal:

“What we find is that there’s this huge misforecast. People think that experiences are only going to provide temporary happiness, but they actually provide both more happiness and more lasting value.”

Next time you’re debating between spending money on an experience or some new material goody, lean toward the experience. Odds are the happiness from the experience will last longer than the temporary happiness that comes from buying a new material item.

3. Debt and (lack of) Happiness

With that said, don’t run to the bank and drain your savings or, even worse, go into debt to fund your adventures around the world. Says Howell in the Wall Street Journal:

“The first thing you should be doing with your money is building up a safety net. If you go into debt to buy these great life experiences, the stress you’ll feel when the credit-card bill comes in will probably wipe out the good that you got from the experience.”

Elizabeth Dunn, a psychology professor at the University of British Columbia, took it a step further when she told Benzinga:

“Savings are good for happiness; debt is bad for happiness. But debt is more potently bad than savings are good…. From a happiness perspective, it’s more important to get rid of debt than to build savings.”

Gaining life experiences is great, but not if you’re sinking into debt to make it happen. Save money before you spend it.

4. Giving Money and Happiness

A 2008 study co-authored by Professor Dunn compared how “personal spending” and “prosocial spending” impact happiness. Personal spending is just that — spending on ourselves, whether it be car payments or buying other goods. Prosocial spending includes buying something for others or donating to charity — cases where you’re giving to someone else without an expectation of receiving something in return.

The study found no correlation between personal spending and happiness, but did find a correlation between prosocial spending and — in the words of the study — “significantly greater happiness.”

Dunn’s study surveyed employees who received a bonus from their employer, and then tracked how they spent that bonus (measuring personal spending and prosocial spending) over the following two months. The findings of the study are fascinating:

“Employees who devoted more of their bonus to prosocial spending experienced greater happiness after receiving the bonus, and the manner in which they spent that bonus was a more important predictor of their happiness than the size of the bonus itself.”

People often think that spending more money on themselves will boost their happiness, but research hasn’t found any correlation between the two. Instead, research shows that giving money to others leads to direct, measurable increases in happiness.

Five Steps for Happiness with Money

How you use the money you have is far more important than the amount of money you make. Here are five steps to approach money in a way that are likely to make you happier along the way:

  1. Take care of the necessities (food, shelter, and so forth)
  2. Pay off debt (all of it)
  3. Build a financial safety net (save and invest)
  4. Spend money on experiences, not material goods
  5. Spend money on others (friends, strangers, charities, and more)

Money doesn’t necessarily buy happiness, but how we use the money we have undoubtedly influences our happiness. When it comes to money, think of these five steps as a framework to minimize regret and maximize happiness.