Does Money Buy Happiness? Let's Find Out

Last Updated Apr 29, 2011 3:09 PM EDT

Happiness and satisfaction with life -- that's what most people really want. But just how much income do you need to be happy and satisfied? A number of studies, including a landmark study by Nobel Prize winner Daniel Kahneman, support the notion that once your basic living needs are met, adding more income doesn't significantly add to your happiness. But other studies show a positive correlation between money and happiness.

One critical aspect of these studies is how "happiness" is defined -- it's a slippery concept to nail down. Some surveys allow the respondents to define happiness themselves, while other studies attempt to use objective measures, such as the amount of time available for leisure activities, or whether you were in a bad mood recently. Obviously, how happiness is defined can drive the results from these studies.

One study found a modest correlation between money and happiness but found a strong correlation between happiness and the number of traumatic events experienced recently. Then the study observed that people in lower socio-economic classes tend to experience more traumatic events.

Another study found that having frequent sex was much more powerful than money at influencing personal happiness, thereby establishing the Beatles as personal happiness consultants (remember "Can't Buy Me Love"?). And some behavioral economists argue that if you spend money on good experiences instead of material things, you can buy happiness. Yet another study found that happiness is related to having a sense of community and not participating in a consumer culture.

Most people would agree that there's more to happiness than the amount of money you have -- or don't have -- and would also associate happiness with such factors as good relationships with family and friends, health, and satisfaction with their work. But which of these factors is most important, and how do they relate to money?

To gain insights into these questions, I worked with Dr. Somnath Basu, director of the California Institute of Finance at California Lutheran University to implement the 2007 Happiness and Money survey. But we didn't publish the results of that survey, primarily because by the time we'd gathered and analyzed the data in 2008, financial markets were melting down, and we felt the results might not be valid. But I wanted to share some of the more provocative results from that survey:

  • Satisfaction with life (self-defined) was moderately correlated with satisfaction with personal finances.
  • For people who reported a recent improvement in their satisfaction with life, improvements in work, finances, and relationships were the key drivers, followed by family and health. Fifty-one percent reported an improvement in their work, 47 percent reported an improvement in their finances, and 43 percent reported improvements in their relationships.
  • For people reporting a recent decrease in their life satisfaction, the most important contributing factors were finances, work, and health. Fifty-six percent reported problems with finances, 55 percent reported problems with work, and 38 percent reported problems with their health.
It appears to be very important to people to be productive and secure, ranking ahead of relationships, family, and health in drivers of satisfaction with life. The strength of the effect of work and finances surprised us.

We're conducting the same survey again, and I invite you to participate. Click here to take the survey; it should only take about 15 minutes. I'll report the results in future posts.

The question posed in the first paragraph -- just how much money do you need to be happy and satisfied -- should be important to people of all ages, but especially for people approaching or in retirement. Boomers will need to make every dollar count in their retirement years -- being aware of how much money you need to be happy will tell you how much retirement savings you need.

Many people are reporting that they plan to work in their retirement years, and earning necessary income is certainly one important, motivating factor. But another factor might be the need to be productive and useful to society; the results of the 2007 Money and Happiness Survey support this notion. Add in the fact that you might live longer if you work in your retirement years, and there's further evidence that the traditional retirement of "not working" might not be the best way to complete your life.

These studies about money, happiness, and work can offer valuable insights to help you plan for a good life. In the end, however, you'll have to think about whether these insights apply to you, and decide for yourself what makes you happy. That's much better than conforming to someone else's definition of happiness!

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    Steve Vernon helped large employers design and manage their retirement programs for more than 35 years as a consulting actuary. Now he's a research scholar for the Stanford Center on Longevity, where he helps collect, direct and disseminate research that will improve the financial security of seniors. He's also president of Rest-of-Life Communications, delivers retirement planning workshops and authored Money for Life: Turn Your IRA and 401(k) Into a Lifetime Retirement Paycheck and Recession-Proof Your Retirement Years.