How Money Affects Your Happiness? Positively or negatively?
The big question is, “Can money buy happiness?”
Most people would always say that money can buy happiness, love and other good things in life.
The truth is that money can bring a sense of security if well managed. Without a handle on money management, you may always feel like your life is one step away from a financial cliff.
“It seems natural to assume that rich people will be happier than others,” write psychologists Ed Diener and Robert Biswas-Diener in Happiness (Blackwell Publishing, 2008). “But money is only one part of psychological wealth, so the picture is complicated.”
Study shows that 80% of people in the world or even more worry about money all the time. You want to avoid being in situations like this and to do that means knowing know to manage your money.
There is this strong correlation between wealth and happiness, the authors say: “Rich people and nations are happier than their poor counterparts; don’t let anyone tell you differently.” But they note that money’s impact on happiness isn’t as large as you might think. If you have clothes to wear, food to eat, and a roof over your head, increased disposable income has just a small influence on your sense of well-being.
To put it another way, if you’re living below the poverty line ($2,500 annual income for a family of four in 2021), an extra $2000 a year can make a huge difference in your happiness. On the other hand, if your family earns $10,000 a year, $5,000 may be a welcome bonus, but it might or might not radically change your life.
So, yes, money can buy some happiness, but as you’ll see, it’s just one piece of the puzzle.
In their personal-finance classic, Your Money or Your Life (Penguin, 2008), Joe Dominguez and Vicki Robin argue that the relationship between spending and happiness is non-linear, meaning every dollar you spend brings you a little happy than the one before it.
More spending does lead to more fulfilment—up to a point. But spending too much can hurt your quality of life. The authors suggest that personal fulfilment—that is, being content with your life—can be graphed on a curve that looks like this:
This Fulfillment Curve has four sections:
In this part of the curve, a little money brings a large gain in happiness. If you have nothing, buying things does contribute to your well-being. You’re much happier when your basic needs—food, clothing, and shelter—are provided for than when they’re not.
After the basics are taken care of, you begin to spend on comforts: a chair to sit in, a pillow to sleep on, a second pair of pants. These purchases, too, bring increased fulfilment. They make you happy, but not as happy as the items that satisfy your survival needs. This part of the curve is still positive, but not as steep as the first section.
Eventually, your spending extends from comforts to outright luxuries. You move from a small apartment to a rented duplex in a luxury estate, and you have an expensive entire wardrobe of clothing. You drink expensive drinks and go out to a club with friends to spend more money. These things are more than comforts—they’re luxuries, and they make you happy. They push you to the peak of the Fulfillment Curve.
Beyond the peak, Stuff starts to take control of your life. Buying a car made you happy, so you buy cars, go shopping to buy the things you want but don’t need. You drink expensive drinks, wear expensive clothes, and drive expensive cars. Soon your house is so full of things that you have to buy a bigger home—and rent a storage unit. But none of this makes you any happier. All of your things become a burden. Rather than adding to your fulfilment, buying new Stuff detracts from it.
The sweet spot on the Fulfillment Curve is in the Luxuries section, where money gives you the most happiness: You’ve provided for your survival needs, you have some creature comforts, and you even have a few luxuries. Life is grand. Your spending and your happiness are perfectly balanced. You have Enough.
Unfortunately, in real life you don’t have handy visual aids to show the relationship between your spending and your happiness; you have to figure out what Enough is on your own. But as you’ll see in the next section, because we’ve been conditioned to believe that more money brings more happiness, most people reach the peak of the Fulfillment Curve and then keep on spending.
How to use your money to say YES
Here are tips to manage your money and be happy:
Managing your money does not need to be difficult. Simply implement these money management tips one at a time to take control of your finances.
1. Make a plan for your money
Without a plan, it is extremely easy to find yourself short on money because it can make it easier to overspend. After all, the treat yourself logic is tempting to embrace. If you say yes to too many unnecessary expenses, then you might be disappointed with your savings. To combat this, take the time to make a budget.
Plan out where you want to use your money. In addition to your everyday expenses, think about your savings goals for the future. You also want to find a budgeting method that works for you because it will help you manage your money easier.
2. Set the right financial goals
If you are getting serious about your money, then setting goals is one of the most important money management tips you can use! Creating financial goals will help you stay focused and motivated towards where you want to be financial.
You’ll need to take a minute to think about your plans and how the money would factor into them. Once you have an idea of how the money will play into your life, make clear and specific goals for your money.
3. Set up the right bank accounts
The right bank accounts are critical to your financial success because trying to manage your finances without the right bank accounts is similar to trying to take care of your car without the right parts. You’ll need to set up checking, saving, and investment accounts.
These are the building blocks of financial success. It is important to get both a checking and savings account so that you can easily separate your spending cash from long-term savings. Simply leaving your savings in your checking account makes it all too easy to accidentally spend your hard-earned savings.
4. Check in with your finances every day
You can’t make progress without knowing where you stand because you won’t know where to start. Take five minutes every day to check in with your budget. Are you overspending? Are you right on track? It’s important to know because then you can make adjustments where necessary.
It might sound stressful and time-wasting or consuming to check into your financial situation every day. However, it doesn’t need to take a long time. Use an app or spreadsheet to quickly determine how you are doing financially and get back to your life.
Automating your finances can also really help to make your life easier.
5. Cut back on your expenses
As you start to look more closely at your finances, first take a look at your spending. Look for expenses that you can cut out of your monthly budget. Even cutting an unnecessary expense of just $40 out of your budget can lead to savings of $200 or more for the year.
Cutting your budget is one of the best money management tips you can use to make saving easier!
6. Take a look at your income
This might seem obvious, but it is important to understand exactly what you earn. So take a minute to determine your net income after taxes, not just your gross income. You’ll be more able to accurately budget with this number.
If you are disappointed in your total income, then consider picking up a side hustle. A lucrative work from a home side hustle can fit into your schedule and help to dramatically improve your finances.
7. Create a plan to pay off debt
Debt is a huge financial burden. Not only does it affect your current budget, but also your savings for the future. Take your debt seriously and make it a priority to pay down your debt.
Consider different debt repayment strategies and pick one that works best for you. Don’t let debt stand between you and your financial goals. Create a debt reduction plan to tackle it today.
8. Build an emergency fund
Planning for unexpected expenses is the best way to manage your money! An emergency fund can be critical. Unfortunately, life throws large expenses your way when you least expect it.
Typically these emergency expenses are accompanied by unpleasant events such as a hospital visit or job loss. You never know when an emergency will appear in your life, but you can prepare for it. Make it a priority to put money into your emergency fund with each paycheck.
Set up a separate savings account to store your emergency fund. Otherwise, it is too easy to spend these funds. When an emergency strikes, you won’t have to worry about the financial side of the equation. Instead, you can focus on the emergency at hand. You’ll thank yourself later for taking this step.
9. Start investing
Learning to manage your money is great, but making it work for you is even better. If you plan to build long-term wealth, then investing is a key piece of that. Investing over a long time can lead to amazing returns. You’ll be able to grow your money slowly as you invest more every year.
If you aren’t sure where to get started investing, then consider taking our free course. You’ll learn everything you need to know about investing your first dollar.
10. Give back
As you start to get your finances under control, it is time to give back. Setting aside time or money to donate can help you make an impact wherever you want to.
Properly managing your finances means that you’ll be able to allocate more time and money to causes you care about. Even if you are only able to help spread your newfound knowledge of personal finance, that could be a valuable gift to someone in need of a helping hand.