We all know the famous phrase: “money can’t buy happiness”. But, we don’t actually know if the phrase is true. We stay late and keep our nose to the grindstone everyday to earn the pay check. If money does not make us happy we wouldn’t bother to chase that promotion or even go to work at all. On the other hand, we still feel empty time despite all the fancy clothes and large house we own. Why is that? Why doesn’t money make us happy? Fortunately, you are not on your own in answering that. Psychologists and economist have teamed up over the last two decades to help you understand better the relationship of money and happiness.

Money can buy some happiness

A study in 2010 suggests that people in the US with annual income higher than $75,000 have better emotional well-being than those with lower income. But as their income climbs over $75,000, it has very little to no effect on their emotional well-being.  This might be due to the fact that certain income threshold is needed for an individual to fulfil one’s basic needs. As another study suggests that the correlation between money and happiness is often small, but effect sizes are larger in low-income developing economies. Indeed, being able to meet basic needs are very important to your mental health. Food, clothes, housing and healthcare are the top priorities. Poverty has also been linked to worse mental and physical health.

Money can actually buy a certain value of life satisfaction. But why after a certain point, money doesn’t bring much happiness anymore? There is a thing called “hedonic treadmill” which basically means we will get used to the pleasure that we experience in the long run. Of course with bags of cash at your disposal, you can pay for an unlimited choice of pleasurable things. It makes you happy in the short term, but you will quickly adjust to your new pleasures. For instance, when you buy the latest iPhone, you suddenly feel thrilled about it. But the buzz doesn’t last. It will soon wear off as you habituate to your new thing. You roll back to your hedonic neutrality. Which also explains the stagnancy of happiness level in many developed countries despite income spikes over the last few decades.

Can’t help but compare

Another reason why large income doesn’t make us happier is we tend to perceive our wealth relative to others. Happiness scholars believe that your wealth relative to others has greater effect on your life satisfaction than your absolute wealth. A paper published in Psychological Science suggests that people gain and lose satisfaction depending on where they think they rank among their peers financially. Luttmer, an Economist from Dartmouth have found that individual’s self reported happiness is negatively affected by the earnings of people who live nearby.

The inclination for comparing ourselves to others is probably a human nature. Just like how we adapt to pleasures. It might be a remnant of our primitive survival strategy.  Nevertheless, we have full control over our mind and body. Eating as much food as we can is also human nature but that doesn’t mean we cannot control how much we eat. Similarly, we are more than able to control the urge to compare with others. The solution is not to compare with people who are worse than us. It is not to compare at all according to University of Stanford Professor, Lyubomirsky. She interviewed undergraduates from Stanford University and discovered that the happiest are the ones who don’t compare.

Make happiness out of money

Suppose you have enough money, now you wonder how to convert money to happiness. But first, you need to know what is it that actually brings happiness. Many studies suggest that friend and relationship are the key to happier life. A Harvard study which first started in 1938, tracked hundreds of sophomores (including John F. Kennedy) and boys from Boston to then collect data on physical and mental well-being. The study lasted for 80 years and it was found that close relationship whether with friends, spouses, or families is the greatest predictor of happiness. University of Chicago’s National Opinion Research Centre (NORC) did a large scale survey and have found that people with five or more close friends are way more likely to regard themselves “very happy” than those with less friends. Indeed, human connection seems to have greater power in generating happiness than money.

Those two studies help explain other studies that suggest spending money for shared experiences contribute to more happiness. Interestingly, even a negative experience turns to something positive once we have the chance to talk about it according to Thomas Gilovich, a psychology professor at Cornell University. Gilovich believes that something stressful or scary can be a funny story when told to someone or be considered a valuable life lesson. His mission is to shift the investment that society’s make to achieve happiness by moving towards experiential pursuits. He goes further by theorizing that the happiest people are the ones who extract most experiences out of everything they spend money on.