In the last fifteen years, positive psychology has tried to tackle the question of “can money buy happiness” by studying people’s happiness levels along with changes in income levels. Also known as the “hedonic treadmill” theory, studies show that once your basic needs are met (clothing, shelter, food) that rich people are not happier than poor people.
As a person makes more money, expectations and desires also increase, which results in no permanent gain in happiness. While a change in fortune may temporarily make you happier, in the long run you are likely to revert back to your normal level of happiness.
However, a big part of happiness is linked to your intentions. Psychologists say that by setting and achieving your goals, you have higher life satisfaction and more sustained happiness than before.
As a financial planner helping my clients navigate their financial future, the hedonic treadmill theory raises two important questions. First, if you have money above your basic living expenses, what should you do with it? And second, how can you make yourself happier? Here are three steps to help answer these questions.
Step 1: Set Goals.
By setting personal financial goals (retirement, college, summer trip
to Europe, new car), you are creating motivation and a positive attitude towards achieving something greater than your everyday life. By achieving these goals and feeling success, you are more likely to have greater well-being and be happier.
Step 2: Get into Action. I mean this literally! Research shows that physical activity and continually challenging yourself to try new things leads to greater happiness through an increased release in dopamine above your normal levels.
Step 3: Set your Expectations.
A change in circumstance (new job, pay raise, new home, new car, remodel, etc.) can be a wonderful thing. My advice is to set your expectations when you have a change in circumstance. Acknowledge that these changes may make you happier in the short-run, but in the long-run you will end up being just as happy as you were before those events.
Just because your happiness is not going to remain at a higher level does not necessarily mean you should not spend money. However, reframe the purchase and look at the utility from the purchase. If you cannot find any utility from it, then determine the real motivation behind the spending and whether it is in-line with your goals.
Stepping off the treadmill is not easy, but if you want to make sure your money is going to where it matters most to you, then the effort is necessary. By following these three steps, I hope you achieve greater clarity on what to do with your money and sustained happiness.