There has been as much research into what makes us happier as there has been into what makes us wealthier.
As financial planners, we are trying to help our clients improve their lives using their money. So, it is therefore important to look at what drives happiness and how it relates to money.
The happiness formula
In his popular happiness formula, Martin Seligman suggested happiness equals the sum of three factors. The first is your Biological setpoint. This relates to how studies suggest up to half of your happiness is inherited, you cannot really change it.
The next factor is your circumstances which research suggests has a small part to play. This means where you live, your health, your age, education, intelligence, gender, race, all these things, have a small impact on happiness. We are adaptable so we quickly readjust if our circumstances change. You can move to a bigger house, and it becomes normal very quickly.
There are suggested some exceptions to this. Research suggests that time in nature is important for happiness and changes the perception of time. Other factors are not living somewhere noisy, not having to commute in heavy traffic and feeling like you are in control.
The remainder of our happiness is determined by our voluntary activities, what we do with our time and money.[1] That is an area where we can hopefully exert some influence on living a happy life.
The two types of happiness
To start, we should define the two types of happiness. The first is experienced which is best described as good feelings, feeling good, pleasure etc. Then, there is reflective happiness which is best described as a deeper sense of fulfilment or being your best self.
A widely cited study suggests experienced happiness plateaus when you earn more than ($75,000/£53,328 pa) but reflective happiness keeps on increasing.[2] Others have suggested the figure for experienced happiness is lower and that reflective happiness stagnates if you earn more than $105,000 (£74,660). It can in fact decrease after this point in certain cases.
A model for happiness
Martin Seligman tried to bring this all together with the PERMA model. The first element of this is Positive Emotion. This includes hope, interest, joy, love, compassion, pride, amusement, and gratitude.
Next, there is engagement, which is finding flow or being absorbed in activities. Then there are strong, healthy relationships which throughout all this literature is a common theme. Strong, healthy relationships being extremely important. The last two are meaning, which is having a sense of purpose beyond yourself, and accomplishment, which is setting and achieving valued goals. We get good feelings from making progress toward a goal and achieving it.
How we get in the way of our own happiness
Our brains have two speeds that can hamper the pursuit of long-term happiness. System one is the automatic quick thinking we do all the time. System two thinking is where we allocate attention to more effortful mental activities that demand it including complex computations. This type of thinking is not on all the time. We need to actively engage it.
Letting the system one brain determine priorities, can result in short-term experience happiness. Those short-term experienced happiness episodes come at the expense, in most cases, of sustained reflective happiness.
There is a trap of thinking that once you have more money, you will figure it out. Many of us can get caught in is focusing on money rather than on what it can do. People who value time more than money are likely to be happier, make more frequent social connections, have a strong relationship with their spouse, and be more satisfied with their job. When we feel that we have more time, we are better able to serve other people, which in turn increases our own happiness.
However, we are living in a time poverty epidemic and some of the biggest causes of time poverty relate directly back to money. People incorrectly believe that earning more money today will allow them to be happy in the future, and they tend to undervalue their time.
What can we do?
In Geometry of Wealth, Brian Portnoy summarizes what matters to humans as the four Cs. Which are:
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Connection, the need to belong,
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Control, the need to direct one’s own destiny,
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Competence, the need to be good at something worthwhile, and
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Context, the need for a purpose outside oneself.
Money can play a role in achieving these things but does not guarantee anything.
We need to meet our basic requirements and that is where the experienced happiness threshold is believed to sit.
However, when used well money can do much more. Money allows us to invest in skills, hobbies, and other activities that drive engagement. Money affords shared experiences, memberships and clubs and things like that and the time needed to build and maintain relationships. It frees up time to be involved in things greater than the self like family, politics, work, community, social causes, volunteering. Money can fund the path to achievement and mastery in sports, hobbies, and work.
The traditional idea of sitting down and setting your financial goals based on some projected retirement date, and a rose-tinted idea of the future is an inherently flawed process. We are not good at guessing what will make us happy in the future and we tend to adapt to whatever circumstances we are in whether they are good or bad.
Instead, we need to look at where we are at now and how we can improve things now and for the rest of our lives.
If you want to talk about anything, feel free to book a free no-obligation chat here.
[1] Seligman (2002). Authentic Happiness: Using the New Positive Psychology to Realize Your Potential for Lasting Fulfillment. New York: Free Press. ISBN 978-0-7432-2297-6. (Paperback edition, Free Press, 2004, ISBN 0-7432-2298-9)
[2] Kahneman, Daniel & Deaton, Angus. (2010). High Income Improves Evaluation of Life But Not Emotional Well-Being. Proceedings of the National Academy of Sciences of the United States of America. 107. 16489-93. 10.1073/pnas.1011492107.
