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Can more money make you happier? Answering this question is incredibly important to good financial planning. Getting it wrong can lead to working too much, saving too much, retiring too late or taking unnecessary risks with your investments.

Everyone needs enough money to live. Beyond that, it’s important to know when money is related to happiness – and when it isn’t.

There are two broad types of happiness: hedonic happiness and eudaimonic happiness. Hedonic happiness is pleasure or feeling good; you know it when you feel it, but it tends to fade quickly and leave you wanting more. Eudaimonic happiness is how you evaluate your life over all when you reflect on it.

Achieving both kinds requires effort, since the paths to achieving them can be conflicting. The compounding effect of doing what feels good now, like eating chips, playing the lottery or buying expensive stuff can lead to regret in the future.

Adaptation and affective forecasting

People tend to adapt to hedonic happiness. Retail spending and monetary gains can produce short-term pleasure boosts that keep us coming back for more, resembling an addiction.

Adaptation also contributes to people being bad at predicting what will make them happy in the future. Big material aspirations such as a bigger house or a luxury vehicle may be less impactful to happiness than we would hope; happiness related to material purchases fades quickly, and materialistic people tend to be less happy.

People also forget about the minute-to-minute details of big purchases, like how the purchase will affect how they spend their time, and those details affect happiness more than the big purchase itself.

Social comparison

Related to adaptation, we compare ourselves to the people around us. For example, moving to a nicer house where you earn less than your neighbour can decrease happiness.

People living in more affluent neighbourhoods exhibit increased material desires and less saving, while those who spend their time in areas where they are better off than average have greater life satisfaction and emotional well-being.

Time and money

One of the problems with the perpetual pursuit of more money is that it usually means spending more time working.

It is necessary for most people to trade some time for money at work, but people who prioritize time over money are happier, have greater social connection and are more likely to choose a job they enjoy.

Having more demands on your time, especially at higher levels of income, and less time for leisure activities are also associated with reduced happiness.

More money

People overestimate how much happier they would be with more money. Even some of the wealthiest households believe they would need a lot more wealth to be perfectly happy.

Money can reduce sadness, and people with low levels of income tend to be less happy, but beyond a comfortable income it is less clear how more money affects happiness.

Some influential studies suggest there is a happiness plateau above which more income no longer increases happiness, while others suggest the happiness plateau only applies to people who were unhappy to begin with. Even then, the marginal increase in happiness decreases with rising income.

People focused on extrinsic objectives like money tend to be less happy in general and overestimate the happiness increase related to achieving those objectives.

Mind over money

The good news is that even if more money is not a happiness silver bullet, people can, with some effort, boost long-term happiness through mindset and intentional behaviours.

Savouring small pleasures increases happiness, and, interestingly, wealthier people have a harder time doing it. Practising gratitude and reminiscing about positive memories also boost happiness.

Intentional behaviours that create a steady flow of positive emotion, engagement through hobbies or work, social connection, meaning and accomplishment should push people into the upper range of their happiness potential. Getting outside in nature and helping other people similarly increase happiness.

The mindset and behaviours associated with increased happiness do not involve expensive material purchases or having a Top 1-per-cent income. Above what is needed to live comfortably, the pursuit of more money for its own sake is likely to do more harm than good.

Money can, to an extent, increase happiness, but getting more money should not be your ultimate goal.

Do you have a question for our adviser? Send it to us.

Benjamin Felix is a portfolio manager and head of research at PWL Capital. He co-hosts the Rational Reminder podcast and has a YouTube channel. He is a CFP® professional and a CFA® charterholder.

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