Understanding the Link Between Money and Happiness

Whoever said money can't buy happiness might not be up to date on the latest research.

Elizabeth Dunn, a psychology professor at the University of British Columbia and the co-author of Happy Money: The Science of Happier Spending, has studied for two decades how to optimize time, money, and technology to promote happiness. Her research reframes wealth not as a destination but as a tool—one that, when used with intention, can make life literally and figuratively richer for you and the people you love.

We sat down with Elizabeth to discuss her findings—as well as the new book she co-authored, Leave the Lights On, which expands the conversation by mapping the surprising ways in which money can be used to build a happier life.

Elizabeth: The definition I use, which is accepted by most scientists, includes three components: ample joy and contentment on a typical day, relatively infrequent negative emotions, and general satisfaction with life. Put another way, do you feel like you're living the way you want?

Elizabeth: The notion that money can't buy happiness is simply false; the data shows that wealthier people are happier than poorer people, incontrovertibly. But we can't assume the relationship is automatic—that more money inherently means more happiness. It doesn't. How we spend, save, and invest our money matters at least as much as how wealthy we are.

Elizabeth: There's nothing inherently great about owning a hammer or a screwdriver—it's what you do with it that counts. People focus excessively on the amount of money they want to have and not enough on how they want to use it. That's where I'd encourage people to put their energy.

Elizabeth: A toddler opening their 15th present isn't getting the same delight as they do with the first—in fact, by the 15th they may be having a tantrum. Adults generally don't throw tantrums, but we do feel the same decline in satisfaction. Your first big raise or investment payoff can deliver a real jolt of happiness; the umpteenth rarely does. We adapt to almost everything, both good and bad. That helps us weather hard times, but it also means we often take wonderful things for granted.

Elizabeth: Research by Chris Hsee, a professor at the University of Chicago, distinguishes between two kinds of purchases. Type A purchases are those for which we have an innate, stable, and widely shared framework for making sense of their value, such as a quality mattress. They help satisfy basic physical needs irrespective of social status. Type B purchases are valuable because of their social status—such as a designer handbag or a luxury car—so the moment someone has a newer or nicer one, your possession feels diminished. But people who own a comfortable bed are happy regardless of the brand of mattress someone else is sleeping on. For lasting happiness, lean toward Type A purchases. As the saying goes, "Comparison is the thief of joy."

Elizabeth: When something costs money, we think in market terms: Am I getting my money's worth? When something is a gift or a giveaway, we generally think in terms of generosity or perhaps not taking more than our fair share. For example, when I get a new coffee maker, I give the old one to a neighbor rather than putting it on an online marketplace for a relatively nominal sum. It shifts the whole dynamic from commerce to community.

Elizabeth: My team and I conducted a "mystery experiment" in collaboration with TED that gave 200 people in seven countries $10,000 each to spend however they wished. When the data came in, charitable donations produced the highest levels of happiness. It's a heartwarming aspect of human nature. That said, giving brings joy only under certain conditions: namely, a sense of connection to the cause, the ability to see your impact, and a genuine feeling of choice.

Elizabeth: How you spend affects your happiness, but where you invest and park your money is one of your biggest opportunities to align your wealth with your values. The sweet spot is watching your money potentially grow in ways you can also feel good about, as opposed to quietly working against your values, whatever they may be. Those decisions tend to have a far greater impact than the small, daily decisions we often agonize over.

Elizabeth: The choices we make with our money give us real possibilities to enhance our own happiness and do some good in the world. There are opportunities everywhere; small changes in how we spend and save that can make a genuine difference, not just in the world but also in how we feel about ourselves.