How Money Affects Happiness

With money ahead, will Mega Millions winners find happiness far behind?

Andrew Plank gets Mega Million tickets for customers Tuesday, Dec. 17, 2013, at Bill's Kwik Chek in Chambersburg, Pa.
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Whoever said you can't be too rich or too thin probably didn't win the lottery. Or know anyone who did. While it may seem like a ticket to Willy Wonka's promised land, winning the lottery is often highly overrated and fraught with turmoil. And so, with the nation abuzz about the soon-to-be-split $636 million jackpot, U.S. News aims to clarify the true value of the prize and what's really at stake.

Among the troubles that come with lottery winnings – aside from the real risk of losing it all and landing in debt – is social estrangement. Newfound riches typically set the winner substantially apart from the demographics of his or her friends and family members, who, in turn, come calling for money, says Michael Norton, associate professor of business administration at Harvard Business School and co-author of "Happy Money: The Science of Smarter Spending."

"Everyone starts to see them as the guy with all the money, and the problem is that, yeah, you've got a lot of money, but if you're actually hurting your close relationships, those are the things that are so important for our happiness," Norton says. As a result, lottery winners may find themselves in the unhappy position of being "very, very rich and much, much more alone."

[Read: Getting Better With Age: Why Seniors Are More Satisfied.]

Money can boost well-being up to a point, after which its power lessens considerably. In 2010, Princeton University researchers put a figure on happiness – roughly $75,000 in salary. "Low income exacerbates the emotional pain associated with such misfortunes as divorce, ill health and being alone," write study authors Daniel Kahneman, a Nobel-prize winning psychologist, and economist Angus Deaton. "Perhaps $75,000 is a threshold beyond which further increases in income no longer improve individuals' ability to do what matters most to their emotional well-being, such as spending time with people they like, avoiding pain and disease, and enjoying leisure."

In other words, a certain amount of wealth relieves financial stress and its associated hardship. But the absence of such worries doesn't necessarily bring about happiness. And once you're financially secure, the returns diminish on your extra revenue. As Norton puts it, if you double an income of $10,000, you've got a profound life change. But an extra $10,000 on top of a $1 million salary? The bump is marginal.

Consider, too, a principle that happiness researchers call "hedonic adaptation," which is to say, you get used to the niceties – a new car and roomier digs – and, as you do, the lift they provide wears off. (Suffering hard blows, sadly, has a more lasting impact, Norton says). In his research with co-author Elizabeth Dunn, a University of British Columbia psychology professor, Norton asked wealthy British investors how much more money they would need for life to be a "perfect 10." Despite the range of their earnings, all of them answered they would need to triple their income.

"Whether you come to it through the lottery or whether you earn it, you can get into a cycle where whatever you have is not enough," he says, stressing the importance of gratitude to happiness.

[Read: How to Be Happier at Home: Tips from Gretchen Rubin.]

Along with the drive to one-up your last material high is the impulse to keep up with your neighbors, aka the Joneses.

In a study on Dutch lottery winners with modest awards (about $25,000), researchers found that their next-door neighbors increased their spending. "If your neighbor wins a nice chunk of money, you are more likely to get yourself a new car or to do some exterior home renovations," says study co-author Peter Kuhn, a professor of economics at the University of California–Santa Barbara and director of its Broom Center for Demography.

But to get the most happiness bang out of your buck, you're better off spending the money on an experience – or on someone else, Norton says. "People who buy experiences chronically and people who give chronically are happier people," he says. "In general, buying stuff for yourself doesn't do anything for you."