Wealth and Well-Being

by James E. Maddux, Ph.D, CWB Senior Scholar

Wealth and Well-Being

“Economic things matter only insofar as they make people happier." - Andrew J. Oswald, economist

Back in the days when I used to carry a checkbook and pay for many of my purchases by check, I had a sticky note inside the checkbook that I saw every time I opened it that reminded me that, as the ancient Chinese philosopher Lao Tzu once said, “He who knows he has enough is rich.” For me, the unstated message of that quote was that I cannot spend my way to happiness and that I’m probably better off with less than with more. 

The connection between money and subjective well-being -– for both individuals and nations -– is complex, and some important questions and inconsistencies in the research remain. My goal in this column (and future columns) is to explore some of the research between wealth and subjective well-being to help you make decisions in your life that will enhance your subjective well-being and life satisfaction.

Subjective well-being is a psychological construct concerned not with what people have or what happens to them but with how they think about and feel about what they have and what happens to them. The study of subjective well-being makes a distinction between the objective conditions of someone’s life and that person’s subjective evaluations of and feelings about his or her life. Plenty of relatively rich, healthy people are miserable, and plenty of relatively poor or unhealthy people lead lives of meaning and joy. Average subjective well-being is greater in some relatively poor countries than in some relatively rich countries. In addition, as rich nations have become richer over the past several decades (as measured by per capita gross domestic product), the average subjective well-being of their citizens has, in general, not increased. 

Nonetheless, money does matter – for nations and for individuals. Most research on the relationship between financial status and subjective well-being and life satisfaction suggests that the relationship is strong, up to the point where a society or an individual is meeting basic needs such as food, shelter, clean water, electricity, and basic health and medical care. After these needs are met, the relationship between wealth and subjective well-being/life satisfaction remains, but additional increases in wealth typically result in smaller increases in subjective well-being and life satisfaction. Being able to finally afford a small luxury like a small television might bring at least a temporary bump in subjective well-being, but buying one for each room is not likely to produce the bump that buying the first one did. The same goes for your second or third car or house. One reason for this is that we quickly get accustomed to new possessions and pleasures and, as a result, start shopping around for a bigger and better possession or pleasure. Psychologists have referred to this tendency as the hedonic treadmill --  “hedonic” referring to pleasure and the “treadmill” metaphor referring to the act of moving and moving (or buying and buying) while staying in one place. 

Another reason that the economic growth of a country does not always lead to greater subjective well-being for its citizens is that, in some countries, increasing national income and wealth is accompanied by greater inequality of income and wealth among its citizens. A recent study of 34 countries found that economic growth over time (greater financial well-being) did not lead to greater subjective well-being among citizens if growth was accompanied by growing inequality of income. One explanation for this is that greater inequality of income and wealth leads the lesser-off people to make upward social comparisons with the more-well-off people. As noted in a previous column, frequently making upward social comparisons (comparing yourself to people who are better off than you in some way) can lead to reduced subjective well-being.

Large studies of using income redistribution to reduce income inequality suggest that such measures can lead to overall greater life satisfaction among the citizens of a country. And it doesn’t seem to matter if you’re relatively rich or poor, a taxpayer or a welfare recipient, and whether you consider yourself liberal or conservative. Reducing inequality in a society is likely to make most people feel  better about their lives. 

How we measure well-being also seems to matter. In an earlier column I made a distinction between different aspects of well-being and their different measures. Emotional well-being refers to the frequency and intensity of our experiences of pleasant emotions (such as joy and affection) and negative emotions (such as stress, sadness, and anger). Life evaluation or life satisfaction refers to what we think about the quality of our lives when we are asked to think about it. A survey of 1,000 Americans found that emotional well-being and life satisfaction have different predictors. Income is a strong predictor of life evaluation or satisfaction, but health, caregiving, and loneliness were stronger predictors of emotional well-being. Life satisfaction continues to rise as income rises, but the relationship between increased income and emotional well-being levels off at an income of about $75,000 (in 2010 dollars). Having money can help protect you from some of life’s inevitable bumps in the road. People with a low income have more difficulty coping emotionally with such negative life events as divorce, illness, and loneliness. Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health, and being alone.  

Economists often make a distinction between income and wealth that is important to this discussion. Research indicates that subjective well-being is influenced not only by how much money you make (income) but also by how much money you have  -- that is, what funds you have stashed away for the proverbial “rainy day.” Cash on hand (and investments that can be easily sold and converted to cash, such as stocks) is referred to by economists as liquid wealth. Research indicates that people with more liquid wealth have more positive evaluations of their financial well-being, which, in turn, predicts greater life satisfaction. This relationship holds regardless of how much money you spend or how much debt you have. The most likely explanation for this relationship is that you will feel more financially secure if you have something stashed away for emergencies (such as losing your job or having an unexpected car repair) and that this security leads to greater life satisfaction.  

Finally, no discussion of the relationship between money and well-being would be complete without a discussion of debt, a topic that I will address in a future column, along with a discussion of the materialism that leads so many people go into debt to satisfy their seemingly endless need for more and more stuff.