When I was in high school, I looked at the upper-middle-class adults in my surroundings and was confused. While doing much better than average financially, many were clearly unhappy. At the same time, I had done enough traveling to know that there were many people in the world with far less who lived with a joy that was unheard of in my neighborhood.

Thus began a research project that's still ongoing: How do money and happiness interact? In the end, I've come down to one very simple conclusion: Money never adds to your upside to long-term happiness, but it can -- if used wisely -- cut down on your downside to misery.

Picture of a coffee cup sitting next to a napkin with different aspects of life written on it.

Image source: Getty Images.

Here are the five fascinating facts that back this up.

1. Once you hit $75,000, there are significantly diminished returns.

Daniel Kahneman is one of the most important psychology figures of our time. The Nobel prize-winning researcher has demonstrated myriad ways that we fool ourselves. One of the key ones is that we're terrible at predicting what will make us happy in the future.

Using this as his starting point, he and other researchers at Princeton set out to discover at what level there started to be diminishing returns for happiness. His subject set were Americans -- an admittedly wide bunch -- but what he found made waves: Once a household has at least $75,000 in annual income, additional money flowing in was a pretty poor predictor of day-to-day satisfaction with life.

The results were immediately applied to the real world. Gravity Payments, based out of Seattle, immediately changed its compensation structure. Every employee would get a base salary of $70,000, effective immediately. According to reviews on Glassdoor, that experiment seems to be working.

2. It depends on where you live.

Seeking to expand upon Kahneman's original research, Gallup wanted to know if the threshold changed based upon where one lived. Obviously, a New York City rent payer is going to need more than a rural Iowa college graduate to make ends meet. Here's how that original base rate changed depending on where you lived.

A map showing the plateau in satisfaction from income by region.

Data source: Gallup.

The results were somewhat surprising, especially because the "East North Central" had the highest plateau mark, and yet it's not a terribly expensive place to live. Perhaps it's because many adult residents still have an acute memory of the Rust Belt disintegration, and they need a higher threshold of money to negate their fears for the future.

3. Money doesn't add happiness, it reduces sadness.

Recently, a research team from Michigan State and the University of British Columbia clarified the role of money in happiness even further. They found that money doesn't really ever add happiness -- it just reduces the amount of sadness that we might have.

Often, we think of happiness and sadness existing on the same continuum, but that may not be the case. They might be entirely separate.

When you're worried about feeding your family, whether or not the heat will get shut off in the middle of winter, or are hounded by debt collectors, chronic stress sets in. That stress makes it impossible to focus on any of the things that make us happy.

Having a little extra cash can help alleviate that stress. While it doesn't make us happier over the long run, per se, it reduces our sadness.

4. So what does make us happy?

The most interesting research I've found on this topic has come from Sonja Lyubomirsky of the University of Southern California. In her book, The How of Happiness, she proposes that there are three basic components to happiness: genetics, our life circumstances, and our intentional activities.

Data source: The How of Happiness.

We obviously have no control over genetics. But our culture reinforces the notion that changing life circumstances -- getting a promotion, buying a new house, etc. -- are the most powerful ways of changing our internal state of contentment.

Not so, says Lyubomirsky. In fact, it's largely how we react to life circumstances that determines our happiness... by a factor of 4 to 1! Lyubomirsky has a laundry list of activities to help us improve this large slice of our life, but they boil down to six simple suggestions:

  • Invest in personal relationships
  • Commit to meaningful goals
  • Take care of your body and soul
  • Live in the present
  • Practice gratitude and positive thinking
  • Learn coping strategies

5. The wise have only one real financial goal, and it's not what you think.

In a landmark 1972 paper, Marshall Sahlins proposed that, instead of living on the razor's edge of existence and extinction, many indigenous peoples of what we call the "Stone Ages" actually lived a life of incredible affluence.

There are two possible courses to affluence... The familiar conception... based on the concept of market economies -- states that man's wants are great [and]... his means are limited.

But there is also a Zen road to affluence, which states that human material wants are finite and few... Adopting the Zen strategy, a people can enjoy an unparalleled material plenty. 

More than 40 years later, former Motley Fool writer Morgan Housel came to a similar conclusion: The only sensible financial goal is freedom of time. Look at the list above -- investing in personal relationships, taking care of your body and soul, and committing to meaningful goals all require something: dedicated time set aside for such activities.

The next time you sit down and ask yourself why investing is worthwhile, acknowledge the appeal of our common goals -- a comfortable retirement, a new house, or pool out back -- and then take it a step further. Why not use the time that the extra money frees up to focus on what will really make you happy?

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