Studies show that money does increase happiness. The latest research shows there’s not even a known satiation point — a higher income makes virtually everyone happier, although each additional dollar delivers less happiness than the one before it.

But we tend to overestimate money’s potential on our happiness by thinking of it out of context. Daniel Kahneman, [4] a psychologist who won the Nobel Prize in economics, writes in the book This Will Make You Smarter: [5]

On average, individuals with high incomes are in a better mood than people with lower income, but the difference is about a third as large as most people expect. When you think of rich and poor people, your thoughts are inevitably focused on circumstances in which income is important. But happiness depends on other factors more than it depends on income.