It’s all relative: how money affects happiness

ARTICLE

10 March 2023

3 min read

It seems every time we check our phone, open our computer or watch TV we’re hit with economic news. Interest rate rises, cost of living pressures, inflation and house prices dominate the newsfeed. But do these things really affect how you measure up on the financial scale? And what do they mean for your financial wellbeing? Despite the economic climate affecting us all, we each have unique financial situations, goals and perceptions – where you fit on the financial scale and where you think you fit could be very different.

Objectively speaking

While it’s easy to let these facts and figures wash over us, in the big scheme of things, the numbers are important: they tell us what we can and can’t afford; they determine the choices we make and the lifestyle we’re able to lead.

These ‘objective measures’ of where we stand financially do provide an insight into our financial wellness. But while they may describe our situation ‘objectively’, it’s the ‘subjective’ measures – that is, how we ‘feel’ about our situation – that often provide a truer reflection of our financial wellbeing.

It’s an important distinction, because research has shown that people with the same objective financial situations can hold more positive or less positive views of their personal wellbeing.¹Equally important, how we feel about our financial situation is a key predictor of overall wellbeing.²

The ‘subjective’ measures – how we ‘feel’ about our situation – often provide a truer reflection of our financial wellbeing.

We can’t help comparing

Whether it’s skimming stones over a pond or running a half marathon, it’s human nature to see how we compare to others. Most often, that means benchmarking ourselves against those around us: friends, family and work colleagues. They become a measure of our financial status.

On a broader level, we can also be influenced by perceptions about the standard of living of others in our community, those who do the same jobs as us, and those whom we perceive to be of the same social class. So what does this mean in terms of our financial wellbeing?

The impact of income and keeping up with the Joneses

If we consider the impact of income on financial wellbeing, some fascinating trends emerge.

Generally, during times when the average income across a country has risen, it has had little effect on people’s happiness.³There are, of course, cases where high-earning individuals have been perceived as happier than others, but overall, more money does not equal greater happiness.

Why? The answer is likely due to how we view our income in relation to those around us.

This relative income – the finances we compare to others who are in similar situations – can determine how we really feel about our own finances.⁴While you may have enough money to pay your bills, support your family and retire comfortably, this may not seem like enough if those around you are in seemingly ‘better’ financial positions.

This influence of financial ‘rank’ is powerful. People in similar financial situations – as indicated by their income or financial assets – may perceive their financial wellbeing differently.⁵ In the US, data shows that having neighbours with higher earnings is linked with lower levels of self-reported happiness.⁶

The happiness lottery

One fascinating insight into financial wellbeing is to consider the effect of winning the lottery. We’ve all at some stage imagined what it would be like to win big and what we’d do with the money. One thing’s for sure: we would expect lottery winners to be happier. Yet, after a short period of time, winners are not, in general, happier than others.⁷ In fact, their enjoyment of everyday events, such as talking with a friend or receiving a compliment, were found to be lower than a group of non-winners.

What can we take from this?

Research tells us that it’s important to look at people’s financial wellbeing from a holistic perspective. Traditionally, financial advice has focused on objective financial wellbeing – focusing on the numbers. But by understanding how financial behaviours, such as subjectively comparing our finances to those around us, can be woven into advice, financial planners can have a richer conversation with their clients to better understand their priorities, goals and dreams.

Financial planners can engage with clients more holistically, for more targeted and personal conversations around financial wellbeing.

Footnotes

^1. Tang TLP et al. Does the love of money moderate and mediate the income-pay satisfaction relationship? Journal of Managerial Psychology (2004), 19(2), pp111-135.

^2. Easterlin RA. Life cycle happiness and its sources. Intersections of psychology, economics, and demography. Journal of Economic Psychology (2006), 27(4), pp463-482. Netemeyer RG et al. How Am I Doing? Perceived Financial Well-Being, Its Potential Antecedents, and Its Relation to Overall Well-Being. Journal of Consumer Research (2018), 45(1), pp68-89.

^3. Dejonge T, Kamesaka A, Veenhoven R. Have the Japanese Become Happier Over the Last 50 Years? EHERO Working Paper (2019).

^4. Clark AE et al. Relative income, happiness, and utility: An explanation for the Easterlin paradox and other puzzles. Journal of Economic Literature (2008), 46(1), pp95-144.

^5. Furnham A, Argyle M. The Psychology of Money. Routledge (1998).

^6. Luttmer EFP. Neighbors as Negatives: Relative Earnings and Well-being. Quarterly Journal of Economics (2005), August, pp963-1002.

^7. Brickman P et al. Lottery Winners and Accident Victims: Is Happiness Relative? Journal of Personality and Social Psychology (1978), 36(8), pp917-927.

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Copyright © 2023 AIA Financial Services Pty Limited (ABN 68 008 540 252, AFSL 231109), trading as AIA Financial Wellbeing. All rights reserved. This information is current at the date of this publication and is subject to change. This provides general information only, without taking into account factors like the objectives, financial situation, needs or personal circumstances of any individual and is not intended to be financial, legal, tax, health, medical, nutritional or other advice. Before acting on the information in this publication, individuals should consider its appropriateness having regard to such factors.