Despite popular assertions to the contrary, science tells us that money can buy happiness. To a certain extent.
Recent research has begun to distinguish two aspects of subjective well-being. Emotional well-being refers to the emotional quality of an individual's everyday experience—the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one's life pleasant or unpleasant. Life evaluation refers to the thoughts that people have about their life when they think about it. We raise the question of whether money buys happiness, separately for these two aspects of well-being. We report an analysis of more than 450,000 responses to the Gallup-Healthways Well-Being Index, a daily survey of 1,000 US residents conducted by the Gallup Organization. We find that emotional well-being (measured by questions about emotional experiences yesterday) and life evaluation (measured by Cantril's Self-Anchoring Scale) have different correlates. Income and education are more closely related to life evaluation, but health, care giving, loneliness, and smoking are relatively stronger predictors of daily emotions. When plotted against log income, life evaluation rises steadily. Emotional well-being also rises with log income, but there is no further progress beyond an annual income of ~$75,000.
This is something we've all seen repeated in multiple studies. Once you have "enough" money to satisfy the basic needs at the bottom of the Maslow's Hierarchy of Needs, you no longer have to worry about food, shelter, security and maybe a little bit of extra money for the unknown - because stacking even more money doesn't do much, if anything, to help you scale the top of the pyramid.
Even if you're fortunate enough to have a good income, how you spend your money has a strong influence on how happy - or unhappy - it makes you. Again, there's science to back this up.
Most people don't know the basic scientific facts about happiness - about what brings it and what sustains it - and so they don't know how to use their money to acquire it [...] Money is an opportunity for happiness, but it is an opportunity that people routinely squander because the things they think will make them happy often don't.
Source: http://www.danielgilbert.com/DUNN GILBERT & WILSON (2011).pdf
Exactly what is, the science of happiness, then? Here's a quick summary of what I understood; but you'll have to read the acutal paper to obtain the details of the underlying studies behind each of these principles.
1. Buy experiences instead of things
Things get old. They become ordinary. You get used to them. They stay the same, or they wear out. Things are difficult to share. Experiences, however, are totally unique; they shine like crystals in your memory and your experiences can be shared as pictures forever. Whenever possible, spend money on experiences such as bungee jumping, rather than on things like a new cellphone.
2. Help others instead of yourself
Human beings are social animals. Intensely so. Anything we can do with money to create deeper connections with other people tends to tighten our social connections (enter: politics). Think of ways to spend part of your money to help others - even in a very small way and adopt it as part of your regular spending habits.
3. Buy many small pleasures instead of a few big ones
Because humans readily adapt to change, the most effective way to use your money is to try and bring a lot of frequent changes; not just the big changes that you will quickly get used to. Break up large purchases into several smaller ones over time so that you can savor the entire experience. When it comes to happiness, frequency is more important than intensity. Try and embrace the idea that lots of smaller purchases can be more pleasurable and effective than a single giant one.
4. Buy less insurance
Humans adapt to both positive and negative change. Extended warranties and insurance prey on your impulse for loss aversion. But it is more often than not that people experience far less regret than they anticipate when their purchases don't work well. Also, having a backup plan also reduces the "high" that people can experience when they make a new purchase. Thus, buy only the insurance you need and don't hunt down generous return policies.
5. Pay now and consume later
Immediate gratification can lead you to make purchases you can't afford, or may not even truly want. Try avoiding deals for the sake of it, that is - don't buy cheap chocolate just because it's cheap. It may not be pleasurable to eat. Impulse buying also deprives you of the distance necessary to make reasoned decisions. It eliminates any sense of anticipation, which is a strong source of happiness. For maximum happiness, savor (maybe even prolong!) the uncertainty of deciding whether to buy, what to buy, and the time waiting for the object of your desire to arrive. It makes the experience that much sweeter.
6. Think about the details
We tend to ignore many details when considering future purchases, but try and focus on the tiny details that you aren't thinking about. Before making a major purchase, consider the actual work involved in owning the thing, and how it changes your everyday schedule - will it be affected by this purchase? Does it justify the time saved? Is the money spent worth it?
7. Follow the herd instead of your head
Don't overestimate your ability to independently predict how much you'll enjoy something. Humans are, generally speaking, very bad at this. But if something reliably makes others happy, it's likely to make you happy, too. Weight other people's opinions and user reviews heavily in your purchasing decisions.
Happiness is a lot harder to come by than money. So when you do spend money, keep these in mind to try and maximize whatever happieness it can buy for you. Remember, it's science!