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If you’ve ever bought yourself a gift to help you cheer up, or lavished on a nice meal because you felt like you deserved it, you’ll be familiar with the relationship between money and happiness. But can money buy happiness? And how much does it cost?

The money vs happiness debate is well-established in psychological and economic circles, and the consensus is that money can buy happiness – for some people and in some circumstances. But contrary to popular (and perhaps, materialistic) beliefs, the relationship is not linear; that is, more money does not equal more happiness.

Rather, at a certain level, which in Australia has been revealed to be about $100,000 annual income, the relationship between money and happiness plateaus, such that there is little difference in happiness between those who earn $150,000 and $250,000. On the other hand, at lower levels of income, more money is associated with linear increases in happiness or life satisfaction, so that if you double the income of a person earning $30,000 per year, it will buy them 5 extra points of happiness.

The reasons for these findings have been debated in the literature, but quite simply, our happiness is made up of more than the things we can buy. A popular tool to measure wellbeing, the Personal Wellbeing Index, considers overall life satisfaction to have 7 contributing domains. Two of them specifically refer to income, but other essentials for happiness include feeling satisfied with your relationships, with what you’re achieving in life, and with feeling part of your community.

The real power of money, when it comes to your happiness, is in how you use it. Money is a flexible resource, which means that in times of need it can be deployed to alleviate stress. You can pay people to do tasks that you don’t like to do, meaning that you can spend your time engaging in activities that contribute more towards your wellbeing. Or, should a health condition compromise your psychological wellbeing, having enough money to pay the bills and keep food on the table means there’s fewer things to worry about.

The reason we think more money will make us happier, even at higher levels of income, is because we’re notoriously bad at predicting what will make us happy. We fail to foresee how quickly we adapt to new conditions, and we fail to understand the homeostatic forces that operate to keep our wellbeing at a stable ‘middle-ground’.

Do not despair, however, because a team of US researchers  have provided some tips on how to maximise your spending for greater happiness. Buy experiences instead of things, they say, help others instead of yourself (as long as you’re earning over $100K/year, otherwise self-sacrifice will come at a cost), and buy many small pleasures instead of a few big ones.

So next time you feel like indulging, consider whether there is a better way that you could be spending your money. If the ultimate goal is to improve your happiness, the most effective way by far is to spend your time connecting with people you love. Essentially, when it comes down to it, the best things in life really are free.

Dr Melissa Weinberg

By Dr. Melissa Weinberg

Dr Melissa Weinberg is an accomplished lecturer, researcher, and public speaker with a wealth of experience in both the research and practical aspects of wellbeing and resilience, and sport and performance psychology.