SELF-DETERMINATION THEORY posits that we have three basic psychological needs: the need for competence, relatedness and autonomy. When these needs are satisfied, we’re more motivated and experience a greater sense of well-being.
To this, you might reasonably respond, “What the heck are you talking about?”
As I see it, self-determination theory provides a useful framework for thinking about the connection between money and happiness. We tend to be happier and more enthused about our daily lives if we’re engaged in activities we feel we’re good at (competence), we’re doing them because we want to, rather than because we’re being forced to (autonomy), and we aren’t socially isolated (relatedness). Along the same lines, I believe that, if we’re smart in how we handle our finances, we can use money to boost our happiness in three ways.
First, money can ease our financial worries and help us achieve a sense of financial freedom (autonomy). Many folks fervently believe that money will buy happiness and are often disappointed when it doesn’t. My hopes for money are somewhat more modest: While having lots of money won’t necessarily make us happier, not having enough could make us extremely unhappy. If we can get to the point where money isn’t something we regularly fret about, we’re probably enjoying the bulk of money’s potential benefit.
Second, money can allow us to spend our days doing what we’re passionate about and what we think we excel at (competence). This is the promise of retirement, when we can spend our days as we wish, without worrying about collecting a paycheck. But with any luck, we can also get to this point during our working years. If we get our financial house in order early in our adult lives, we may have the financial freedom to work fewer hours or to swap into a career that’s less lucrative, but which perhaps we might find more fulfilling.
Third, money can make it possible to have special times with friends and family (relatedness). This is a key reason that experiences tend to deliver more happiness than possessions. Experiences, such as concerts, vacations and meals out, are often enjoyed with others, and that brings extra pleasure to these occasions.
The above blog is an edited excerpt from Jonathan’s latest book, How to Think About Money.