Can money make you happy?

We all want to be happy. Happiness feels good and it improves your health – lowers your blood pressure, lowers your heart rate, and strengthens your immune system, so you’re sick less. And not only do you enjoy your life more, you actually live longer!

And most of us want to be wealthier. But here’s the question: Can money make you happy?

Well, yes and no.

It’s true that richer people are, on average, happier than poorer people. 45% of richest quarter of Americans are happy, compared with 33% of the poorest quarter.

But one extra dollar of income will make you happier if you are poorer than if you are wealthier – the poorer you are, the more that extra dollar of income increases your happiness. That makes sense, because if you’re hungry, a dollar buys food, where if you’re already fed and clothed and housed, you might not even notice that dollar.

In countries with per capita incomes of less than $20k/year, there is a strong association between income and happiness. e.g. people in Moldova (average income under $2k/yr) are significantly less happy than those in Hungary with average income around $10,000/year. But in countries with per capita incomes over $20k/yr (Italy, Japan, Norway, Netherlands, US, the average percentage of people who report themselves as “happy” or “satisfied” clusters between 80% and 95%. People in the Netherlands, Ireland, Denmark, and Canada all report being happier than those in the US, despite slightly lower per capita incomes. Also, happiness in the US and Britain haven’t increased since 1950, despite very real increases in real income per person.

Why?

Well, it depends on whom you compare yourself to:

Yes, money makes you happy if you are richer than those to whom you are comparing yourself.
No, money doesn’t make you happy, if you are poorer than those to whom you are comparing yourself.

The rich compare themselves to a group which generally includes people less well-off than they are, because most people are less well-off. while the poor will generally compare themselves to a group which includes people better off, because there are so many better off.

A study done at Harvard asked people, would you prefer to live in Word 1 or World 2, where in

World 1: you get 50k/yr, others get $25k
World 2: you get 100k/yr, others get $200k

A majority preferred World 1.

According to Richard Layard, in his book, Happiness, “People care greatly about their relative income, and they would be willing to accept a significant fall in living standards if they could move up compared with other people... A rise in other people’s income, relative to yours, hurts your happiness. One study suggests that if everyone else earns another 1%, your happiness falls by one-third as much as it would rise if you yourself earned an extra 1%. So if everybody’s income rose in step, your happiness would rise, but only 2/3 as much as it would if only your income was rising... Income is much more than a means to buy things. We also use our income, compared to others, as a measure of how we are valued by society and (if we’re not careful) a measure of how we value ourselves.”

So if you want to be happy, compare yourself to those who are doing worse than you. Your mother was right – think of the starving children in Africa.