IStock Photo 12445272 © Peter Kim

We know it can’t buy us love—but can money buy happiness? A causal link between money and contentment is intuitive. Isn’t that what the rat race is all about? Yet there are scores of very unhappy people with very robust bank accounts. What accounts for this disconnect? Does money always buy happiness—or does it matter what it’s spent on?

Research suggests that money does make people happier, but only to a certain point. In the US, the odds a person with a family income under $30,000 reports being very happy are 1 in 4.17, compared to 1 in 3.03 for those with family incomes between $30,000 and $74,999. Beyond that, money continues to have an effect on happiness, but the percentage improvement is less significant. The odds are 1 in 2.63 that a person with a family income between $75,000 and $99,999 will report being very happy, and 1 in 2.04 for a person whose family income is $100,000 or higher.

Harvard psychologist Daniel Gilbert tells Newsweek that money affects happiness only so far as it raises people out of severe poverty. So it makes sense that on a scale of 1-7, homeless people in Calcutta rate their happiness on average at 2.9 (compared to 5.8 for American multimillionaires), while those living in Calcutta’s slums rate theirs at 4.6—closer to the wealthy Americans than their homeless neighbors.

Once basic needs are met, what people spend their money on might be more important than how much money they have. In the US, the odds a person will donate to a church or non-profit in a year are 1 in 1.19 (84%). And according to the latest research, those who give to charity may be happier than those who don’t.

Elizabeth Dunn, a psychologist at the University of British Columbia, and her team surveyed more than 630 Americans about their spending patterns and general happiness. They found that people who spent money on “pro-social” causes—gifts and charitable donations— were happier than those who devoted money only to personal spending.

Spending on experiences also has a lasting positive impact. Vacations, theater tickets, and meals with loved ones all strengthen social bonds. Since a strong social network is a key indicator of happiness, it’s logical that putting money towards improving relationships would be beneficial. Ryan Howell, of San Francisco State University, tells NPR that experiences satisfy psychological needs in ways that material goods do not.

Dunn suggests that this pattern helps explain why happiness levels don’t surge during economic booms. People tend to spend their extra funds on consumer goods that don’t correlate to lasting happiness, rather than the pro-social and experiential spending that could make them feel better in the long term.

But families struggling to pay the rent and keep food on the table are hard pressed to give even a small fraction of their income to charity. Are they forever tethered to discontentment, just because their pay checks go straight to the bills? According to Dunn’s research, not necessarily. Not much money has to be spent on others to bring about noticeable benefits.

To test this, Dunn and her team gave college students a $5 or $20 bill, and instructed half to spend the money on someone else and half on themselves. At the end of the day, those who spent the money on a gift or a meal with friends reported greater happiness than those who spent it on themselves. Intuitively, $20 sounds better than $5, but how the money is spent is actually more important. That’s good news in a tough economy.

Knowing this, the concept of retail therapy seems woefully misguided. Need a pick-me-up? It might be wiser to put some cash toward a good cause, or take a friend to coffee, than to splurge on a new pair of shoes.