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Money Buys Happiness BUT...| New Research reveals How it Works!

Money Buys Happiness But: Researchers have been trying to nail down how much money contributes to happiness for years. Daniel Kahneman published a landmark study that showed that happiness increased with more money, but up to the point of making about 75K per year for a household.

Another researcher, Matthew Killingsworth, took on the same question and found that happiness and income kept going up.

So which one is right? They went through a collaborative mediation process and wrote another paper to reconcile their differences.

In this episode, we discuss how much happiness money can buy, why you want to avoid headaches, and other things that bring happiness, too.

For the comments: We're interested in you finishing the sentence: Money buys happiness but...

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Bridget: New research reveals more subtlety about how income and happiness are related, and that's what we're going to talk about today on Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I own a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I own a fee-only financial planning practice in Middleton, Wisconsin. And before we start to talk about money and happiness, I just want to remind everybody to hit that subscribe button. Subscribing to our show helps other people find this information on YouTube and makes us happy.

Bridget: That's true.

John: With that, I always love this research, Bridget, on how money is a tool to help us do things. And one of the big things is how does it make us happier? And there's been some conflicting research, I think, and then maybe some resolution to that.

Bridget: Well, it's kind of interesting because there're have been two major studies that have conflicted. The first was led by Daniel Kahneman who has won a Nobel Prize, so he gets a lot of attention and his research said that income makes you happier up to a certain point and then it levels off. There’s still a slight increase after that point, but it levels off. And that point was $75,000, but actually that was per household. And so, it was $40,000 for an individual and $75,000 for a household. That was in 2012, so with inflation numbers in the new research, they're saying it's about $50,000 and $100,000. Those are the numbers.

John: Okay.

Bridget: The other person is Matthew Killingsworth. His research showed that your happiness keeps going up as you earn more. So this is actually, from my point of view, an important thing to consider. One thing is they both agreed that it worked on a logarithmic scale. This means that your happiness increases if your income doubles, not if it just goes up. So sometimes people think, “I earn more than I used to, I should be a lot happier.” Well, the happiness increase really only matters with a pretty big income increase. Does that make sense?

John: Yes.

Bridget: Although people are more familiar with going from maybe $20,000 a year to $40,000 a year. $40,000 a year to $80,000 a year is the same amount of increase as $20,000 to $40,000. And then $80,000 to $160,000 is the same amount of increase, but that's a lot more money. So it does take more money as you go up to increase happiness, and they agreed on that in the first place.

John: Okay.

Bridget: So they got together with a mediator…

John: Really?

Bridget: Yeah. And what they did was they looked at their studies again. And in Kahneman's research, everybody rated themselves. It was based on a Gallup Poll information, which is a large database, and actually both studies had very large databases. And people would rate themselves at the end of the day by answering questions, like: “Did you have these unhappy feelings? Did you have these happy feelings?” And from that they created a score, and then they used their income. Killingsworth actually used iPhone data and asked people three times a day, “How are you feeling right now from very bad to very good?”

So this turned out to be the key factor—how they were measuring happiness—not about their income differences. And so, what ended up happening is they started looking at around the $100,000 mark, because that seemed to be where the issues were. And they found that how they measured happiness was the key factor. In the original research, they kind of measured unhappiness a little better than it measured happiness just because of the nature of the way they asked questions.

I don't know if cell phones were as available during the original research as they were during Killingsworth’s research, but they found that it was easier to look at the happiness part and not just is it happy or unhappy, so they had a better range of happiness. And I think that we experience this, too. There's an upside to happiness with many levels, but the downside has fewer levels: unhappy, very unhappy, extremely unhappy. For happiness, however, there're more degrees, there're more gradients as you go up the scale.

John: Right.

Bridget: So what they found is around $100,000 is the people who are unhappy don't get any happier with more money, but the people who are happy in general get happier.

John: Interesting.

Bridget: And the happiest people get even happier than the average happy person.

John: So with the original was measuring unhappiness slightly more than the level of happiness. Listen, above that $75,000 or $100,000 in today's dollars, I'm not going to get any happier necessarily because that's my natural bent or that's how I'm reporting.

Bridget: That brings up another issue that I thought was very interesting. It can be a natural bent, but it also can be your circumstances. It's not just the grumps. It could be bereavement, broken heart, clinical depression, and chronic illness. I just know from my research that those things make people unhappy.

John: Yeah.

Bridget: The other thing is that they caution people against pursuing money for happiness, because there're so many other things that actually have a bigger bang for your buck😊 A bigger impact on your happiness than your income.

John: So income does influence happiness, but on a scale, there're other things that are more perful.

Bridget: Yes, exactly. And it’s the same with unhappiness. So, for instance, the unhappiness brought on by a headache is worse than what you can really accomplish with money. And if you think about it, that's true. A decent headache makes you much unhappier, while things like getting married, having good social relationships, those elevate your happiness more, I believe, than how much money you make.

John: That makes sense.

Bridget: And it's kind of easier as far as your effort goes.

John: As you think about the old adage, “Money can't buy happiness.” And some of us accept that at face value. Some of us have challenged it and done research, like the folds we are talking about, but compared to having good relationships or having or not having a headache, money is not going to buy your way out of those things.

Bridget: Right.

John: But the idea that money isn't a factor seems wrong. Money is a factor in happiness, just not as powerful as some of those other things. A headache is a great example. No matter how much money I have, if I have a headache, I'm pretty miserable.

Bridget: Exactly. I was just thinking about some other researchers, Elizabeth Dunn and Michael Norton, who wrote a book called Happy Money. I think it was published in 2014. And one of the things that they found was that how much you give away, either to other people or as gifts, like donations, gifts, et cetera, which they call pro social spending, has a bigger influence on your happiness than how much you make.

John: Interesting.

Bridget: Not just spending but spending in a certain way matters.

John: So we've talked a little bit about these interesting connections between money and happiness. And in our world, we hear about the $75,000 level or $100,000 in today's dollars; we hear people say that it doesn't make you happy, or it does. The evidence is, however, that as your income goes up, the happier you are. Perhaps it's not as impactful as other things, such as relationships and physical health, but it still plays a role. What's a takeaway or an action step? What do we do with this information?

Bridget: Well, for me, it actually helps me figure out what to pursue. How should I spend my time? I can get a certain amount of happiness from trying to make more money. There's a certain amount of happiness to be had there.

John: It is valuable; it’s useful.

Bridget: And there's also a feeling of accomplishment there but then there're other ways that are kind of lower hanging fruit, like giving money away and having better relationships. So trying to improve my relationships is really important for me. And I don't know which is easier, trying to make more money or improve your relationships, but the latter has a lot more potential for happiness.

John: That idea of what to focus on, I think, is really helpful. And I know people that will say, “Hey, forget relationships. Money does buy happiness. I'm going to focus on getting more money.” And the idea of, no, there're other places where you can find more happiness is important for balance. And I know other people who say, “Money is just not important. That doesn't make any difference. I'm good at focusing on my relationships, my health, and other things.” And maybe if that's your take on things, you can go, “You know what, having some focus on the money can improve your life.” And if you're one that is focused on money, maybe some of those other things become meaningful. And having balance is what I'm taking away.

Bridget: Yeah. So with that, I'm Bridget Sullivan Mermel. I'd love to see our viewers comment on this topic, so please scroll down and add a comment. We'd love to hear from you. Also, if you shoot me an email, that'd be great too. The name of this show is Friends Talk Financial Planning. I'm Bridget Sullivan Mermel, and I've got a fee-only financial planning practice in Chicago, Illinois.

John: And I'm John Scherer. I've got a fee-only financial planning practice in Middleton, Wisconsin. And as Bridget said, jot down a comment or shoot an email. We’d love to hear what you think about happiness and money. If you like what you hear on our show, Bridget’s firm and my firm are both accepting new clients, but we're also members of the Alliance of Comprehensive Planners, a group of fee-only comprehensive planners nationwide. And you can find an advisor in your area by looking up

Bridget: And please subscribe.

At Sullivan Mermel, Inc., we are fee-only financial planners located in Chicago, Illinois serving clients in Chicago and throughout the nation. We meet both in-person in our Chicago office and virtually through video conferencing and secure file transfer.

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