As sayings go, money can't buy love, and the love of money is the root of all evil. They also say that money can't buy happiness, but some interesting recent research shows that actually, financial wealth levels really do affect happiness. However, it only helps if you spend it on the "right" things, and act up front to head off your irrationality.


The inspiration for today's blog post comes from a book I'm currently reading, "WellBeing - The Five Essential Elements" by Tom Rath and Jim Harter. In the book, researchers explore the results of a series of broad, globally based research projects that look at what brings about happiness and wellbeing, that spans cultures, populations, and countries. Ultimately, Rath and Harter find that the essential elements of wellbeing fall into five categories - career, social, financial, physical, and community - and offer guidance and tips about how to improve wellbeing in each of those categories.

Wearing my financial planner's hat, I found some of the conclusions regarding financial wellbeing to be very interesting. Rath and Harter start out by noting that at the most basic level, having money does matter - or more broadly, that people in wealthier nations (as measured by GDP per capita) really do experience population-wide higher average levels of wellbeing. Much of this seems to be attributable to the capacity to buy the basic necessities in life - food, shelter, and clothing - as well as the ability to afford basic health care. However, higher wealth levels also allow us to generally have more control over our lives - by means using our money to let us do more of what we want to do, when we want to do it - and are associated with greater wellbeing.

Based on the subsequent research studies cited, the book gives three additional "tips" about how to promote financial wellbeing for all. The first is that while more wealth seems to facilitate happiness, the greatest impact is when the money is used for others, not yourself; those who use give some of their money to help others or for charitable purposes express higher levels of happiness and wellbeing. The second is that while having money to spend helps happiness, it turns out that spending money on "stuff" has almost no impact; spending money on experiences has far more beneficial value. The third is to acknowledge that we are irrational, and take steps to fend off our own irrationality; put your difficult financial decisions on autopilot to the extent possible (e.g., automatic deposits for savings), and invest in a manner that does not cause you to worry excessively.

Seems like sound advice. Those who give, receive. Spend money on experiences which can create memories that last, not stuff that depreciates (in both its financial and happiness value). Put your money in a position that it supports your goals, not invested in a manner that makes you worry even more. What do you think?


2 Tweets / Trackbacks

  • Wednesday, December 1st, 2010
    The personal finance space has no shortage of tips to managing your spending, from bag lunches in lieu of eating out at work to home-brewed ... | Nerd's Eye View
  • Monday, December 6th, 2010
    In the research on Wellbeing, nothing is more important than being able to wake up every morning with something to look forward to doing ... | Nerd's Eye View

Michael E. Kitces

I write about financial planning strategies and practice management ideas, and have created several businesses to help people implement them.

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