By Barbara O’Neill, Ph.D., CFP®
A common concern of Personal Finance Managers (PFMs) is their clients’ financial well-being and happiness. According to research conducted by the Consumer Financial Protection Bureau (CFPB), there are four elements of financial well-being:
- Feeling in control over day-to-day, month-to-month expenses
- Having the capacity to absorb a financial shock (e.g., car repair)
- Being on track to achieve financial goals
- Having financial freedom to make choices to enjoy life
This CFPB study report notes people with a high level of financial well-being are more likely than others to feel in control of their day-to-day financial lives. Other research has linked feeling in control with happiness; i.e., individuals reporting higher daily control experience greater average happiness.
Taken together, these two related findings beg the question, does money buy happiness?
A 2021 study by Killingsworth showed that, contrary to a previous 2010 study that was widely cited for a decade, there no dollar-value plateau at which money’s importance lessens as a determinant of happiness. Earlier research had suggested that happiness subsided beyond an annual income of approximately $75,000.
One potential reason for the money-happiness link: Higher earners feel an increased sense of control over their lives. Simply put, a higher income provides more options. Killingsworth also used a different methodology than earlier studies with over 1.7 million data points collected in real time over seven years about respondents’ (N = 33,391) emotions using a proprietary Track Your Happiness app.
Study results also showed that, at any income level, income is only a modest determinant of happiness. Therefore, Killinsworth cautioned against spending excessive amounts of time trying to earn money and noted the importance of buying experiences, instead of objects, and of maintaining strong interpersonal relationships. Shared experiences, like a special meal or trip, help enrich relationships.
What do these findings mean for financial practitioners? Consider the following implications:
- Help People Earn More – Recent research indicates that life satisfaction and well-being increase with income. Help clients brainstorm ways to build human capital to earn a higher income now and prepare for future career growth. Unless income is greater than expenses, it will be impossible to save money.
- Identify “Small Wins”- Help people build financial confidence and a sense of control by setting, and then achieving, small, meaningful goals that can be gradually “leveled up.” Techniques such as savings challenges can provide structure to take positive action.
- Reduce Money Hassles– A steady and increasing income, not only facilitates purchases, but helps keep people away from the “financial edge,” thereby providing happiness-inducing feelings of calm and control. Resulting savings builds resiliency to handle unforeseen shocks and hassles, which reduces financial stress.
For additional information, review this University of Nebraska article.
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