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Why does being rich not make you happy?

The bottom line: Money can't make you happy if your increased wealth brings increased expectations. In other words, if you want more as you earn more, you'll never be content; there will always be something else you crave, so you'll need to work even harder to get the money to buy it.

oreilly.com - 1. It's More Important to Be Happy Than to Be Rich - Your Money

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You don’t want to be rich—you want to be happy. Although the mass media has convinced many Americans that wealth leads to happiness, that’s not always the case. Money can certainly help you achieve your goals, provide for your future, and make life more enjoyable, but merely having the stuff doesn’t guarantee fulfillment. This book will show you how to make the most of your money, but before we dive into the details, it’s important to explore why you should care. It doesn’t do much good to learn about compound interest or high-yield savings accounts if you don’t know how money affects your well-being. If personal finance were as simple as understanding math, this book wouldn’t be necessary; people would never overspend, get into debt, or make foolish financial decisions. But research shows that our choices are based on more than just arithmetic—they’re also influenced by a complex web of psychological and emotional factors. This chapter gives you a quick overview of the relationship between money and happiness. You’ll also learn techniques for escaping the mental traps that make it hard to be content with what you have. As you’ll see, you don’t need a million bucks to be happy.

How Money Affects Happiness

The big question is, “Can money buy happiness?” There’s no simple answer.

“It seems natural to assume that rich people will be happier than others,” write psychologists Ed Diener and Robert Biswas-Diener in Happiness (Blackwell Publishing, 2008). “But money is only one part of psychological wealth, so the picture is complicated.” There is a strong correlation between wealth and happiness, the authors say: “Rich people and nations are happier than their poor counterparts; don’t let anyone tell you differently.” But they note that money’s impact on happiness isn’t as large as you might think. If you have clothes to wear, food to eat, and a roof over your head, increased disposable income has just a small influence on your sense of well-being. To put it another way, if you’re living below the poverty line ($22,050 annual income for a family of four in 2009), an extra $5,000 a year can make a huge difference in your happiness. On the other hand, if your family earns $70,000 a year, $5,000 may be a welcome bonus, but it won’t radically change your life. So, yes, money can buy some happiness, but as you’ll see, it’s just one piece of the puzzle. And there’s a real danger that increased income can actually make you miserable—if your desire to spend grows with it. But that’s not to say you have to live like a monk. The key is finding a balance between having too little and having too much—and that’s no easy task. Note A recent article in the Journal of Consumer Research showed that, in general, our feelings for material purchases fade more quickly than they do for experiential purchases. Material goods depreciate: The day after you buy something, it’s usually worth less than you paid for it. Experiences, on the other hand, appreciate: Your memories of the things you do—vacations you take, concerts you go to—become fonder with time because you tend to recall the positives and forget the negatives. The Fulfillment Curve American culture is consumption-driven. The media teaches you to want the clothes and cars you see on TV and the watches and jewelry you see in magazine ads. Yet studies show that people who are materialistic tend to be less happy than those who aren’t. In other words, if you want to be content, you should own—and want—less Stuff. Note Because Stuff has such an important role in your happiness (and unhappiness), it deserves a capital S. You’ll read more about Stuff throughout this book, especially in Chapter 5. In their personal-finance classic Your Money or Your Life (Penguin, 2008), Joe Dominguez and Vicki Robin argue that the relationship between spending and happiness is non-linear, meaning every dollar you spend brings you a little less happiness than the one before it. More spending does lead to more fulfillment—up to a point. But spending too much can actually have a negative impact on your quality of life. The authors suggest that personal fulfillment—that is, being content with your life—can be graphed on a curve that looks like this: Figure 1-1. The Fulfillment Curve This Fulfillment Curve has four sections: Survival . In this part of the curve, a little money brings a large gain in happiness. If you have nothing, buying things really does contribute to your well-being. You’re much happier when your basic needs—food, clothing, and shelter—are provided for than when they’re not. Comforts . After the basics are taken care of, you begin to spend on comforts: a chair to sit in, a pillow to sleep on, a second pair of pants. These purchases, too, bring increased fulfillment. They make you happy, but not as happy as the items that satisfied your survival needs. This part of the curve is still positive, but not as steep as the first section.

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Luxuries . Eventually your spending extends from comforts to outright luxuries. You move from a small apartment to a home in the suburbs, say, and you have an entire wardrobe of clothing. You drink hot chocolate on winter evenings, sit on a new sofa, and have a library of DVDs. These things are more than comforts—they’re luxuries, and they make you happy. They push you to the peak of the Fulfillment Curve. Overconsumption. Beyond the peak, Stuff starts to take control of your life. Buying a sofa made you happy, so you buy recliners to match. Your DVD collection grows from 20 titles to 200, and you drink expensive hot chocolate made from Peruvian cocoa beans. Soon your house is so full of Stuff that you have to buy a bigger home—and rent a storage unit. But none of this makes you any happier. In fact, all of your things become a burden. Rather than adding to your fulfillment, buying new Stuff actually detracts from it. The sweet spot on the Fulfillment Curve is in the Luxuries section, where money gives you the most happiness: You’ve provided for your survival needs, you have some creature comforts, and you even have a few luxuries. Life is grand. Your spending and your happiness are perfectly balanced. You have Enough. Note Yup, Enough gets a capital E, too. You’ll learn more about deciding how much is Enough later in this chapter. (And don’t worry: There aren’t any more words with goofy capitals ahead.) Unfortunately, in real life you don’t have handy visual aids to show the relationship between your spending and your happiness; you have to figure out what Enough is on your own. But as you’ll see in the next section, because we’ve been conditioned to believe that more money brings more happiness, most people reach the peak of the Fulfillment Curve and then keep on spending. Caught Up in the Rat Race Typically, as your income increases, your lifestyle grows with it. When your boss gives you a raise, you want to reward yourself (you deserve it!), so you spend more. All that new Stuff costs money to buy, store, and maintain. Gradually, your lifestyle becomes more expensive so you have to work harder to earn more. You think that if only you got another raise, then you’d have Enough. But in all likelihood, you’d just repeat the process by spending even more. Psychologists call this vicious cycle the hedonic treadmill, though you probably know it as the “rat race.” People on the hedonic treadmill think they’d be happy if they just had a little more money. But when they get more money, they discover something else they want. Because they’re never content with what they have, they can never have Enough. Most Americans are stuck on this treadmill. According to the U.S. Census Bureau (http://tinyurl.com/census-inc), in 1967 the median American household income was $38,771 (adjusted for inflation). Back then, less than one-fifth of U.S. families had color TVs and only one in 25 had cable. Compare that with 2007, when the median household income was $50,233 and nearly everyone had a widescreen color TV and cable. Americans now own twice as many cars as they did in 1967, and we have computers, iPods, and cellphones. Life is good, right? But despite our increased incomes and material wealth, we’re no happier than were in the ’60s. Note In case it’s been a while since your last math class, here’s a quick refresher: If you have a set of numbers, half of them will be greater than the median, and half will be less. The median is usually different from the average. For example, in the group of numbers 2, 3, 4, 5, and 101, the average is 23, but the median is only 4. (If economists talked about average incomes instead of median incomes, their numbers would be skewed by billionaires like Warren Buffett.) Since 1972, the National Opinion Research Center has been polling Americans about their happiness (http://tinyurl.com/norc-gss). As you can see in the following graph, the numbers haven’t changed much over the past 35 years. About one-third of Americans consistently say they’re “very happy” with their lives (http://tinyurl.com/gss-happy), while a little less than one-third say they’re “pretty well satisfied” with their financial situations (http://tinyurl.com/gss-satfin). Figure 1-2. Info from the National Opinion Research Center’s General Social Survey If Americans are earning more, why aren’t they happier? We’ve been led to believe that prosperity brings peace of mind, but it turns out your grandfather was right: Money isn’t everything. The bottom line: Money can’t make you happy if your increased wealth brings increased expectations. In other words, if you want more as you earn more, you’ll never be content; there will always be something else you crave, so you’ll need to work even harder to get the money to buy it. You’ll be stuck on the hedonic treadmill, running like a hamster on a wheel. The hedonic treadmill leads to lifestyle inflation, which is just as dangerous to your money as economic inflation; both destroy the value of your dollars. Fortunately, you can control lifestyle inflation. You can opt out, step off the treadmill, and escape from the rat race. To do that, you have to set priorities and decide how much is Enough. The next section shows you how.

oreilly.com - 1. It's More Important to Be Happy Than to Be Rich - Your Money

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