The Role Of Money And Finances On Happiness

Money is a fundamental aspect of human life throughout the world. People spend a large fraction of their time earning and spending money. In wealthy and poor societies around the globe, there is now an enormous concern about economic development, and in most nations, it is the main policy issue. Advocates for low-consumption lifestyles have recently received a boost from scientific studies showing that higher levels of consumption are at most, very weakly related to higher levels of subjective well-being. Subjective well-being refers to how positively or negatively a person experiences their own life, and it includes such things as positive emotional states, cognitive appraisals of one’s life satisfaction, and a person’s subjective sense that they are leading a meaningful life. Twenty years of studies consistently show that once basic needs are met, increases in income produce short-term pleasures but have almost no lasting impact on happiness (Layards, 2005). A multilevel analysis by Schyns (2000) found that individual income explained only 2.5% of the difference in subjective well-being between people. This result has been raised in studies using improved measures of economic status that account for wealth, cost of living, family size and other variables (Heady et al., 2004), but still stayed relatively low at around 5% in developed economies, leaving 95% of the variance in subjective well-being to be explained by other variables.

Economic growth in the last decades in most economically developed societies has been accompanied by little rise in SWB and increases in individual income lead to variable outcomes. People who prize material goals more than other values tend to be substantially less happy, unless they are rich. Thus, more money may enhance SWB when it means avoiding poverty and living in a developed nation, but income appears to increase SWB little over the long-term when more of it is gained by well-off individuals whose material desires rise with their incomes.

Currently, the most influential theory on the organization of values presents a multiple terminal value model. Schwartz and Sagiv (1995) list 10 basic categories of human values; power, achievement, simulation, self-direction, tradition and conformity. Rather than arranging these values in a pyramid with subjective well-being on top, they arranged it in a circocomplex. In this view, the pursuit of subjective well-being is not the ultimate end of all action, but just one possible value competing with others such as the pursuit of honor or the desire to follow cultural traditions. The multiple terminal values model provides a simpler explanation for the pursuit of money, is consistent with the human experience of regret when making difficult value tradeoffs and it posits no underlying unified rationality to all human action.

One reason for believing that the desire for income and consumption may have evolutionary roots is the observation that the desire for money follows the same patterns with regard to subjective well-being as drives that are clearly biological, such as the need for food, sex and sleep. As with income, if people are severely deprived of food, sex or sleep, they tend to be quite unhappy (Myers, 2000). Subjective well-being tends to increase as quantities of food, sex, sleep and income rises to some basic level. But past that level, increases in any of these things do not continue to bring increased subjective well-being. In fact, the strong desire for food, sex, sleep or income, beyond a moderate level, is associated with depression and neurosis (Kasser, 2002). Economists have noted that much of consumption is centered on gaining and displaying social status. Consumers are often presumed to want this social status because it brings subjective well-being. In fact, wealth-based prestige has been shown to have no positive effect on subjective well-being (Sheldon & Kasser, 1998). Further, the more people want the type of prestige that comes from wealth, the less happy they tend to be.

The variation of the strength in the relationship between income and happiness may be explained by two theories (Schyns, 2001). The first is the “theory of comparison”, according to which happiness depends on living standards and the perception of living circumstances. As a result, the theory suggests that an increase in an individual’s income cannot lead to a significant increase in happiness if the income of others increases as well. A second theory is Maslow’s “theory of needs”, according to which a good and happy life can be achieved if the needs of the individual are widely met. Basic needs such as material needs can be easily achieved, but the effects of satisfying these needs on happiness are limited. Hence, the increase in happiness depends on the emphasis of meeting spiritual needs, aspects which differ from one culture to another.

Another reason that income might be related to well-being is that people learn to desire material goods, and the fulfilment of desires leads to feelings of well-being, regardless of whether other needs are met. Emmons (1986) found that achieving goals leads to higher subjective well-being. If people want money because of social learning, obtaining money could be linked to feelings of well-being. The possibility of goal fulfilment as a mediator is suggested by Biswas-Diener, Vitterso and Diener (2005), who found that some groups without much income (Massai and Amish) have reasonably high subjective well-being. The researchers proposed that this is due to the fact that the Amish and traditional Maasai have relatively low material aspirations, although their basic material needs are met. Conversely, Graham and Pettinato (2002) found that people with rapidly rising incomes sometimes feel frustrated because their aspirations have outpaced their incomes. These findings suggest that it may not be only the fulfilment of actual needs that connects income to well-being, but it could be that people’s material desires are important as well.

In lottery studies, Brickman and colleagues found that winners were non-significantly happier and were significantly less pleased with everyday events; but the number of respondents was very small. The issues faced by the lottery winners in the United Kingdom (Smith and Razzell, 1975) demonstrated that higher income is not necessarily good and can have limitations as well as benefits. For example, many of the lottery winners lost old friends. In addition, family and friends who wanted part of the earnings were often recipients of what they perceived as an inadequate amount of money, thus leading to interpersonal friction. A related finding is that people whose income have risen have been found to be more likely to get divorced, thus possibly offsetting the higher SWB that could possibly follow from having more money. These studies suggest that possible negative effects of income on interpersonal relationships may be an important consideration, but there is little systematic longitudinal research on this topic.

On the other hand, wealth is related to many positive outcomes in life. For example, people with higher incomes tend to be given lighter prison sentences for the same crimes, have better health and mental health, have greater longevity, lower rates of infant mortality, are less frequently victims of violent crimes, and experience fewer stressful life events (Wilson et al., 1995). Researchers also assume that wealthier nations present with a greater SWB because they are higher on a large number of desirable characteristics such as equality, literacy, longevity, health, human rights, lower crime, and democracy. Schyns (1998) found that national income substantially predicts SWB beyond the effects of individual income, suggesting that additional variables such as human rights and equality might increase positive experience in wealthier nations.

There are three models can be integrated to explain the relation between income and SWB. People in industrial society are socialised to work, and to enjoy participating in the consumption of the culture. Desires arise both from the innate needs (the human nature approach) and from cultural goals; those who can make greater progress towards these desires will tend to be happier because goals are frequently a salient judgement standard. However, having higher income is not infallible indicator of the number of desires that can be met because some individuals with high incomes can develop lofty material aspirations. In addition, the effects of income must be considered within the framework of other human needs – such as for close social relationships and interesting activities – and within the cultural context.