Ch. 24: Happiness

24.0 Introduction

            In this chapter, we get downright philosophical.  What’s the meaning of life? I don’t know and I’m sure that my guess is much different from yours.  But we all want to be happy, and happiness should come before money in our list of priorities.  Money and wealth are merely tools, not outcomes.  In this chapter, I provide a survey of research and opinions on happiness and the role of money in achieving life satisfaction.

24.1 Happiness and Spending

            Most of this book provides instructions for amassing and building wealth.  In general, these practices should lead to more life satisfaction, given that income and happiness are found to be closely connected in most academic studies.  While a well-known academic paper (source) indicated that life satisfaction plateaus once one reached an income of about $110,000[1], recent research (source) suggests that the connection between income and happiness persists at all levels of income.   Presumably, these findings can be extended beyond annual income to one’s net worth.  Through sound financial decisions, one can most optimally convert work into wealth and financial literacy can elicit happiness.

However, choosing how and when to spend money can be a challenge when you are fully aware of the benefits of investing and the time value of money.  What does academic research tell us about the relationship between spending and wellbeing?  The list below provides a survey, but we are all unique.  So, what makes you happy may not move the needle for others.

1.      Spending on activities generates more happiness than spending on stuff. [2] 

The literature on this is clear.  Individuals that spend money on activities, such as travel, dining out, or concerts, report more happiness from their purchases both in the moment and in retrospect.  Author Bill Perkins[3] suggests that spending on activities generates “memory dividends”.  By going on an adventurous trip or engaging in a unique experience with friends, one can enjoy the memories for years to come.  Perkins argues that it’s often wise to spend extravagantly even at an early age—the younger one is when they engage in a fun exploit, the more time they have to reap the rewards of the memory.  It’s an interesting idea and runs contrary to typical financial advice.

2.      The value of material spending exerts two distinct impacts on wellbeing.

The “boost” in happiness that arises from purchases is fleeting.  When you buy a new vehicle, for example, your happiness is quickly increased.  But the happiness generated is fleeting as the novelty of something new wears off. 

Also, the accumulation of material goods sets a new standard.  Once the consumer’s new car no longer feels new, they now aspire to attain and even better vehicle.  The individual is always striving for novelty and will never be satiated.  This idea is labeled hedonic adaptation and is explained well by the following image:

3.      Spending money on others promotes happiness.[4]

People who spend money on others instead of themselves report higher levels of happiness.  The direction of this correlation could go both ways—perhaps spending on others makes one happier or perhaps happier people like to spend money to help others.  While the latter cannot be ruled out, there indeed appears to be a causal benefit from spending.  In randomized trials, those that were asked to spend money on others reported higher levels of happiness than those that were asked to spend money on themselves.

  Personally, I have found that young adults’ spending habits run contrary to what academics finds creates happiness.  When I was in my early 20s, I wanted more stuff—new furniture, new clothes, new appliances, etc.  Spending on activities felt wasteful since activities were ephemeral and with a low net worth, I didn’t even consider spending on others.  Perhaps the findings provided in this section will cause you to deeply consider how you can use your wealth to optimize happiness.

24.2 Non-monetary predictors of happiness

            In general, there is a clear connection between reported levels of happiness and economic wellbeing.  This is evidenced by surveys of happiness in low-income vs. developed countries.  Countries with strong economies, like the United States, Canada, Australia, and Finland—report higher average levels of happiness than poorer countries (source).  While wealthier countries have their problems, most residents in these nations have their basic needs met and can focus some of their efforts on activities that are not related to survival.  Of course, economic opportunity and wealth do not fully explain levels of happiness and there are many other factors.  Here are a few:

1.      Health and Exercise

Unsurprisingly, health plays a major role in happiness.  In fact, it appears that physical and mental health are far more important than one’s income (source).[5]  Healthier people are generally happier, but it’s unclear how this relationship works.  Improved health may lead to happiness and/or happiness may cause improvements in health (source) and lead to general success in life (source).  Unsurprisingly, exercise serves to boost health and happiness.  Even modest levels of exercise are associated with higher levels of self-reported happiness (source). 

But health is not limited to the physical realm.  Mental health is also, of course, important.  Those suffering from depression may benefit from cognitive therapy (source).  If you are suffering from depression or any other mental illness or disorder, I encourage you to seek help (source).

Sleep also impacts health happiness.  Most Americans are sleep deprived, which is associated with an array of physical and mental problems.[6]

2.      Relationships

Meaningful, close relationships play an important role in happiness.  This association appears strongest among romantic relationships.  Marriage is associated with better health, economic status, and happiness (source).[7]  But of course, a dysfunctional marriage is much worse than no relationship and unhappy people are more likely to enter into a bad relationship (source).  Thus, happier people are better at making the choice of whether to stay single or marry.  

Friendships and familiar relationships are also related to happiness.  For young adults, especially those not in a romantic relationship, connected relationships with one’s mother and friends are associated with higher levels of happiness (source).

Regarding relationships—think about the amount of effort you put into getting a job and making money.  You complete 20+ years of schooling, largely in the pursuit of income, and work 40+ hours/week for decades to earn a living.  The choice of a partner (if one desires to have one at all) and cultivation of friendship are perhaps more important than your job and financial status, yet I’m guessing you exert far less effort towards cultivating relationships.  And, trust me, it gets harder to establish friendships as you age.  Take your relationships seriously and treat your friends well. 

3.      Childhood

Although some portion of one’s childhood and future outcomes are innate (not impacted by their environment), the environment and family structure in which a child resides plays a key role in adulthood.  Just about every aspect of one’s adult life seems to be a result of their childhood experiences.[8]  Childhood trauma is especially pervasive, adversely impacting the adult lives of its victims (source1 and source2).  So, if you decide to have kids, keep in mind the impact you will have on their lives.

24.3 Threats

            Each semester, I ask my Personal Finance students to construct a premortem.  Students are tasked to imagine themselves as financial failures during late adulthood and to theorize what would be the most likely culprits.  I encourage you to engage in this thought experiment now.  Imagine you are 60 years old and are looking back on your life and realize that you have not achieved your financial goals and now face the prospect of working beyond your anticipated retirement date.  What caused you to fail?

            Typically, my students land on poor financial mistakes. Perhaps they saved too little, didn’t invest properly, or racked-up credit card debt.  In my opinion, these are unlikely reasons for you to fail financially.  If you had the drive, patience, and persistence to read this passage, I’m guessing you also have the motivation and talent to attain a good job and manage your finances well.  Financial mistakes, purely financial mistakes and missteps, are made by people that don't have adequate financial training… that’s not you.  Instead, here are the types of problems that are most likely to derail your finances:

1.      Picking the Wrong Partner

The older I get, the more I realize that a sizeable share of the population is absolutely nuts.  And not in a good, fun way.  To be clear, I don’t mean to make light of the serious mental problems and past traumas that would make a person a poor partner today.  But I feel compelled to stress that marrying (or even worse, starting a family) with someone facing serious mental health issues can make life miserable.  I’ve seen it.  In the US, 43% of first marriages, 60% of second marriages, and 73% of third marriages end in divorce.[8]  While the devastation caused by a divorce varies wildly, it’s believed that suffering from a divorce is more stress-inducing than imprisonment, death of a family member, or a major personal illness (source).  I’m no relationship-ologist so I don’t have any additional pearls of wisdom to impart, but it’s clear that you should treat relationships seriously.[9]

2.      Addiction

Addition comes in many forms and of varying degrees.  In his 2017 book (link), Steve Sussman estimates that about half the adult US population is suffering from at least one addiction at any given moment in time.  While addiction to alcohol, tobacco, marijuana, and more illicit drugs come to mind first, behavioral additions (e.g. gambling and shopping) and food addictions can be equally devastating.  Such addictions are clearly connected to financial duress; for example, those with a hard drug addiction are nearly four times as likely to be in debt than other folks (source).[10]  While environmental factors are important, addictions are hereditary in nature.  So, if you have a parent or family member that has struggled with addiction, it’s far more likely that you will too. 

3.      Mental Illness or Depression

This is discussed in section 23.2, but it’s worth mentioning again.  The average person has a 15% to 18% chance of developing depression and some point during their lives (source), with women about twice as susceptible.  There’s a clear connection between mental struggles and financial duress.  For example, individuals with a mental disorder are more than twice as likely to be in debt compared to other members of society (source).12  

4.      Medical Struggles

Among the many potential pitfalls one faces, perhaps this is the one that can most easily be addressed via financial literacy.  While a knowledge of the efficient market hypothesis or HSAs won’t stave-off cancer, financial skills will help you fight it while keeping your financial life on-track.  In the US, 41% of of adults have medical debt and 24% are considering bankruptcy as a solution to their debt (source).  What can you do?  Pick a good health insurance plan and avoid lapses in coverage.

I can go on-and-on about the merits of an HSA, Roth IRA, and so forth, but the value of such financial tools are useless if you don’t have your life in order.   Your mental health, physical health, and relationship status will probably have more impact on your finances than any direct financial advice I can give you. 

24. 4 Conclusions

            There’s some doom and gloom in this chapter but remember that humans are subject to a negativity bias—we are predisposed to dwell over potential threats than the revel in our successes.  If you read this entire book, I truly believe you’re on a path to success and happiness.  Take a moment to congratulate yourself… and now it’s time to turn these ideas into reality. Best of luck!

End Notes

[1] The linked article, which used data from 2008 and 2009, showed that happiness leveled-out at $75,000. The $110,000 figure is inflation-adjusted.

[2] This article provides both experimental evidence of these findings and a survey of literature with corroborating findings.

[3] Bill Perkins is the author of Die With Zero.  I plan to read it one of these days.

[4] Sources: source1,source2, source3. 

[5] Of course, these factors are linked.  Those with higher incomes tend to be healthier (source).

[6] This is not a scientific paper, but it does a good job of surveying prior literature. 

[7] Interestingly, the linked research does not find meaningful effects for cohabitation without marriage.

[1] This article provides a pretty good literature review.

[8] Read more here.

[9] I’m one-for-one on happy marriages.  Shout out to my wife, Kendra, for being a great spouse.  I will upgrade her to “amazing” if she ever actually reads my book as she promised to do.

[10] This is not necessarily a causal relationship.  

Key Terms

Hedonic Adaptation:  The concept that humans will adjust to attainment of material items and goals.  For example, one might think that getting a $10,000 raise will make them happy and fulfilled.  But once the raise is received, they quickly adjust to the increased wages and continue to seek additional compensation growth.

Premortem:  The thought experiment in which a person considers why a project might fail before it begins.