Does money buy happiness? Looking at some of the recent research on this topic suggests that advisers need to understand their client's personality to really know the answer, and most importantly, how to help their clients align their spending with greater satisfaction.
It depends on how you look at it. A commonly cited answer to this question comes from researchers Daniel Kahneman and Angus Deaton, who analyzed nearly half a million survey responses about subjective well-being. They found that emotional well-being, which is how someone feels about their everyday experiences, increases as incomes rise, but only until about $75,000. After that, additional income doesn't really have an effect.
When they looked how someone feels about their life as a whole, they found that individuals with higher incomes tended to feel better about their lives. On the one hand, more income can improve our emotional well-being — but only to a point. On the other hand, more income tends to make you feel better about your life as a whole.
Material goods versus experiential spending: That said, there's more to the story than just income. Some researchers argue that how you spend your money can impact your life satisfaction. Psychologists Leaf Van Boven at the University of Colorado Boulder and Thomas Gilovich at Cornell University found that spending on experiences (like concerts and travelling) rather than purchasing material goods (like jewelry and expensive clothes) made people happier. It turns out that the race to have the most stuff may not actually follow the path to happiness. Why? They suggest that positive experiences can be recalled later and even incorporated into one's identity, not to mention that experiences shared with friends and family can improve our relationships and enhance life satisfaction.
Materialist versus experientialist: At this point, we might conclude that spending on experiences is going to make us happier. But before you encourage clients to spend a fortune on a world cruise, Dr. Jia Wei Zhang and his colleagues found that achieving happiness from experiences may depend on whether or not you identify as a materialist or an experientialist. According to his research, only those who identify as experiential buyers actually reported greater levels of happiness from experiential purchases.
Who benefits? Not only does how we spend our money have an impact, but also who benefits from our spending. Researchers Elizabeth Dunn, Lara Aknin and Michael Norton found that people who gave money to charity and to others had "significantly greater happiness," whereas spending on oneself didn't really have an impact on happiness.
So maybe the key to financial bliss is to give it all away? Not so fast, argue Graham Hill and Ryan Howell, researchers at San Francisco State University. They found that giving money to others only improved happiness scores for people who scored high on "self-transcendence values," which is a fancy way of saying that people who have more concern for others improve their happiness when they give to others and to charity. Not surprisingly, people who are more concerned about themselves don't see the same impact on happiness when they give.
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Role of personality: In the end, does money buy happiness? Researchers at the University of Cambridge have probably come closest to answering the question. In an article published in Psychological Science, they suggest that money buys happiness when spending best matches our personality. Analyzing more than 75,000 bank transactions and linking them to personality types, they found that spending that psychologically "fits" one's personality had a stronger impact on life satisfaction than one's income or overall spending.
What advisers can do: If maximizing happiness can be achieved by spending in a way that is consistent with personality, forward-thinking advisers might want to consider ways to discuss or even assess the personality of their clients. Advisers could take a formal approach and use an actual personality test, like one based on the Big Five personality traits. Or they might take an informal route and simply discuss personality characteristics and spending with their clients.
For example, an adviser helping clients visualize their retirement could ask if they tended to be more introverted or extroverted. For introverted clients, the adviser might ask if spending more time gardening or reading books was appealing, since these expenditures are perceived to be more introverted. For extroverted clients, an adviser might instead focus on spending more time eating out with friends or traveling.
If advisers are trying to help their clients make the most of their financial resources, helping those clients figure out how best to spend their money is important aspect of what they do. Advisers can help clients spend in a way that's most likely to bring about the greatest level of happiness and life satisfaction.
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Benjamin Cummings is an associate professor of behavioral finance at the American College of Financial Services.
