Here is an excerpt from the Not Exactly Rocket Science Blog:

Elizabeth Dunn from the University of British Columbia wanted to see if there were ways of channelling the inevitable pursuit of money towards actually making people happier. Together with Lara Aknin and Michael Norton, she asked a representative group of 632 Americans to disclose their average monthly expenditure and to rate how happy they were.

She found that personal spending, including bills, living expenses and treats for oneself, made up 90% of the average outgoings but had no bearing on satisfaction. On the other hand, people who spent more money on others by way of gifts or charitable donations, were much happier for it. That either suggests that selfless spending increases happiness, or just that happier people are more likely to plump up more money for friends or charities.

Dunn sought out firmer conclusions by watching what happened to people who received an unexpected windfall. She surveyed 16 employees at a Boston firm who were given a bonus that ranged from $3,000 to $8,000. About two months later, Dunn grilled them about how they had spent the money and again, regardless of the size of the bonus, those who devoted more of their windfalls to selfless ends ended up happier, while those who splashed out on themselves did not. To paraphrase a saying, it’s not how much you have, it’s what you do with it that counts.

Finally, Dunn tested this theory through an experiment. She gave 46 people either $5 of $20, and an afternoon to spend it. Half of the lucky volunteers were told to splurge on themselves, while the other half had to buy a gift for someone else or to give the money to charity. By the evening, the charitable individuals felt happier than they did in the morning while the self-spenders did not, regardless of which bill they were given, and despite the fact that they were acting on instructions.

And in a deeply ironic twist, the types of behaviour that allow money to buy happiness are subverted by the presence of, you guessed it, more money! Higher incomes bring greater self-sufficiency and as people start to need less help themselves, they tend to provide less for others. In psychological experiments, just the mere thought of money made people less likely to donate to charity, help acquaintances or spend time with friends, exactly the types of behaviour that are linked to happiness.

An emerging viewpoint from the science of happiness is that a persons’ circumstances in life – their income, jobs and so on – tend to have limited long-term effects on their happiness. People mentally adapt to stable situations unless they learn to actively engage with their circumstances – simply put, savour the moment or your goalposts will shift. This latest study is consistent with this idea, for it showed that the way in which money is spent has a greater bearing on contentment than how much is made.

There is a silver lining then. While Dunn’s work implies that of selfless spending is the key to happiness, it also suggests that you don’t need to pauperise yourself to do it. The experimental study suggested that paying as little $5 towards a selfless cause can result in a significant spike in happiness. Given that the volunteers in the first study only spent 10% of their earnings on other people, there is plenty of leeway for purchasing a bit of pleasure.

And if all of that seems obvious in hindsight, consider this: when Dunn asked a fresh group of 109 people about the things that would make them happiest, she found that they were, on average, doubly wrong. A majority of 63% predicted that personal spending would make them happier than selfless spending while 86% said that they would be happier with the $20 bill than the $5 one. Those are certainly the intuitive answers, but they are not the empirical ones.

Dunn, E.W., Aknin, L.B., Norton, M.I. (2008). Spending Money on Others Promotes Happiness. Science, 319(5870), 1687-1688. DOI: 10.1126/science.1150952