4 Ways Money Buys Happiness

How to invest happily.

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If you have ever felt confused about the relationship between money and happiness, you're not alone. Even the Beatles were torn over the subject, declaring in one famous song, "You can't buy me love," and then lamenting in another, "Your lovin' don't pay my bills—give me money. That's what I want."

Gallup researchers have helped clear up this conundrum through a series of worldwide polls. The results have once again stirred interest in this ancient debate, answering with the discovery that annual earnings over $75,000 fail to add to an individual's happiness. Thinking less about money and financial security—as opposed to net worth—also played heavily into an individual's happiness.

[See 5 Financial Resolutions for the New Year.]

Daniel Gilbert from the University of Liege took the Gallop finding further through his research into what is now known as the "experience-stretching hypothesis." His studies demonstrate that when individuals experience greater luxuries, their ability to appreciate the simpler pleasures in life decreased incrementally. These findings put an ironic twist on the American dream of wealth and the good life. As Gilbert points out, just when someone has finally gathered the discretionary income to enjoy the finer things, he subconsciously trains himself to lose appreciation for the more common, daily pleasures.

Jonah Lehrer of Wired commented on these findings as well, stating, "Strangely, the more we indulge our desires, we strangely end up simply needing more. Discovering satisfaction—the ability to appreciate all we already have, is revolutionary."

Before you jump on the "money can't buy me love" bandwagon, however, it is important to note that the findings revealed that money can, in fact, be useful in promoting well-being in several surprising ways. Here are four ways money can, in fact, buy you happiness:

Invest in index funds using asset allocation: Beware of the torrent of wealth managers pitching their Yoda-like prognostications, technical analysis wizardry, or insider stock tips. The Wall Street machine seeks to appeal to your greed glands and lure you into its complicated web of high fees and high stress. These active investment strategies fall short both financially and psychologically. Low-cost indexing, asset allocation, and regular portfolio rebalancing will empower you to reject the greed mantra and free your mind for the more important activities.

Give to charity: Charitable giving was shown to improve a person's sense of happiness. When people freed up money to support a cause they believed in, their happiness rating increased. When you determine your asset allocation, you may want to practice the historic discipline of carving out some pre-determined portion of your earnings for charitable causes. Adding this giving principle to your portfolio's allocation will provide an excellent return to your sense of well-being.

[See The Million-Dollar Retirement Plan.]

Invest in personal growth: When money was spent on personal or professional growth, an individual's overall sense of well-being increased. Graduate studies, counseling, and other forms of development seem to pay great dividends in personal satisfaction.

Allocate to memory capital: Money may not be able to buy you love, but according to research, it can buy you great life memories. Researches call "memory capital" money spent creating outstanding experiences that will be savored over a lifetime. Such memories are revisited by individuals throughout the seasons of their lives, delivering an excellent psychological annuity.

In the end, research affirms what many intrinsically know. Materialism has its limitations, and money should be used both for retirement planning as well as for living. While global diversification through index funds and ETFs will aid retirement goals, allocating to charity, personal growth, and memory creation are also essential parts of a well-diversified life.

Steve Beck is cofounder of MarketRiders, an online investment advisory and management service helping Americans invest for retirement. MarketRiders gives investors greater piece of mind knowing that they are leveraging the best thinking of Nobel Laureates and the investing methods used by the world's most elite institutions and wealthiest families. MarketRiders is on the investor's side, helping reduce investment costs and risks, and increasing retirement savings.