How Money Can Buy Happiness—Wait, What?

Money apparently couldn’t buy love for The Beatles, but they were also under the impression that there are eight days in a week, so can we really trust them? And I’m not sure if we can blame it on the Beatles because it would be shallow and disgusting to believe that money could buy us happiness, right?

Well, it turns out that maybe… it can. But not in the way you think. 

The Happiness Plateau—is it real?

Recently, I listened to a Planet Money episode that discussed the old idea that money can’t buy happiness, and it asked if psychological research bore that out. And, let me tell you, it was fascinating. You should definitely give it a listen. 

First, they discussed the famous 2010 study by Nobel Prize winners Daniel Kahneman and Angus Deaton. That study found that higher household incomes actually do correlate with greater happiness, but only up to a point. Once a household’s income reaches around $75,000 USD a year (the range they gave was actually $60-90k, to be exact), more money didn’t seem to make any difference in how they measured people’s emotional well being. 

That $75,000 threshold has come to be known as the Happiness Plateau—the point at which more money does not buy any more happiness.

This study was so famous, that for the past decade people have run with it as solid evidence that money doesn’t buy happiness, at least no more happiness than a basic middle-class income provides. 

And it feels right, doesn’t it? Once your basic needs are met and you have some reasonable comforts, why would you need more money to be happy? It also feels good to think that people who are much wealthier than ourselves are actually not much happier than we are. That’s probably why this idea of a happiness plateau is so common it’s practically a cliche at this point. 

Plot twist…

‍What if I told you that a 2021 study questioned all of this? It turns out that more money actually does correlate with more happiness well beyond the tried-and-true $75,000 mark, and it’s not just due to inflation. 

Psychologist Matt Killingsworth killed our sense of worth (see what I did there?) with a new study using more robust data collection methodologies that found that people are generally happier the more money they make. 

Turns out money can buy happiness after all. Every after-school-special you’ve ever watched about a workaholic dad in a sad business suit was wrong.

Well, at YNAB we know that’s not the whole story. You don’t have to be a bajillionaire to experience true happiness. There’s another way: lining up your money and your values. But more on that later, because there’s more research to discuss. 

But it’s not just about the money

So how to reconcile these two studies? This is where it gets really interesting. 

The two groups of researchers got together to try to figure out why they disagreed so strongly. After concluding their methodologies were both sound, they realized that they came to different conclusions, because they were actually measuring different things. 

If you’re a research nerd, you’ll have to listen to the podcast episode for all the juicy science details, but the bottom line is: it’s not really about how much money you make, it’s about how you spend it.‍

The most interesting information came when the researchers looked closer at the people on the extremes—the happiest and the saddest people in their study. 

For the saddest people in the study—the people who consistently reported the least amount of happiness—there actually was a happiness plateau. But for the happiest people in the study—the people who consistently reported the highest amount of happiness—the plateau disappeared. In fact, there was an exponential increase in happiness the higher their income rose. 

What does this mean? Well, I love the way that one of the podcast hosts, Sally Helm, put it: “Maybe these are just people who know how to spend money really well on things that make them happy.”

She was exactly right. It turns out happiness does have a relationship with money. But that relationship is not in how much you make, it’s in how well you spend. 

…happiness does have a relationship with money. But that relationship is not in how much you make, it’s in how well you spend. 

I’ve seen this in my own life too. When I started using YNAB, I wasn’t actually making more money, I was just spending it more intentionally. As I consistently gave every dollar a job, I discovered the kind of spending that made me the most happy and started shoveling my money in that direction. So even though I wasn’t making any more money, I felt happier. 

If you aren’t spending your money well, it doesn’t matter how much you make. Your increased income is not going to contribute to increased happiness. But if you are spending your money well, the happiness your spending brings only increases as you make—and therefore spend—more. 

What does it mean to spend money well?

So this begs the question, “What does it mean, then, to spend money well?” I’m happy to say I’ve got an answer for you! After all, that’s what we’ve been teaching here at YNAB for over 20 years! 

Spending money well means cultivating an alignment between how you spend your money and the life you want to live. It means aligning your spending with what matters most to you—what we call spendfulness.

Discovering what matters most to you is a continuous pursuit that we all must make on our own. That’s why you’ll never see any of us at YNAB tell you how to spend your money. But we do have a practice to help you define your priorities and values.

The YNAB Method is the practice that will help you achieve this state of alignment between your spending, and well, your self. You do that by consistently giving every dollar a job, by deciding what you want to do with your money before you spend it. 

As you do, you’ll not only discover what you want out of life but you’ll create a framework to make sure your money flows toward those things. 

This practice will allow you to spend without guilt and without second guessing, to live freely knowing that you are actually spending your money exactly how you truly want to. The end result will be more happiness, and—the research now suggests—even more happiness the more money you spend.

It’s all about how you spend

If your spending doesn’t bring you happiness now, more spending won’t help. But if you do the work to discover what you want most out of life and make sure your money flows toward those things, your spending can increase your happiness.

So, maybe the Beatles were wrong in not caring too much for money. After all, they seemed to change their tune about it eventually. And, sure, money in and of itself is just money. It’s what you do with it that matters. If you can align your money toward your priorities, and have a life full of the things that matter most to you, well, that is a happy life. 

So, can money buy happiness? Sure. It just depends on how you spend it.

There is no better way to discover what you want out of life than to consistently give every dollar a job. Sign up for a free trial of YNAB today, and we’ll show you how.

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