How Much is Enough?

How much income does it take you to be happy?

I know that's a blunt question. It's purposefully blunt. Most people have a number in mind, and their number tends to be slightly higher than what they currently make.

If you're not aiming for a certain income number, you might be aiming for a certain type of house. Or kitchen. Or shiny SUV.

I have been thinking more about this topic recently because of a conversation with a client about the relationship between spending money and happiness. This client thinks he needs to have a certain lifestyle (i.e. spending) in order to have happiness during his retirement. The question I posed to him is essentially this: does the family that spends $150,000 have double the life happiness as the family spending $75,000 per year? And what if the $150,000 spending family is paying $30,000 per year toward debt (principal and interest on loans), while the family spending $75,000 is 100% debt-free? 

Fortunately for us, we have hard data to answer the question of whether money buys happiness. And if money does some level of happiness, is there a law of diminishing returns at play?

Have you heard of Daniel Kahneman? He's a psychology professor at Princeton University. Kahneman has won the Nobel Prize in Economic Sciences (2002) and the Presidential Medal of Freedom (2013). His 2011 book Thinking, Fast and Slow has sold well over a million copies. What I'm saying is, the man has serious credibility.

In partnership with the Gallup Organization, Kahneman studied 450,000 people to find out whether money buys happiness. Their findings are fascinating.

Once household income surpasses $75,000 per year, emotional well-being ceases to increase.

I drew a really fancy chart to help make that statement clear:

If you want the more scientific-looking chart, here is the one from Kahneman's white paper:

My comments:

  • The median (middle) household income in the US is $56,500. So a family earning $75,000 actually earns about 32% more than the average family. 
  • Look at the "Stress free" line. The magic income number there is $60,000. Once a household reaches $60,000 in annual income, they have statistically reached the highest likelihood of being stress-free.
  • If your family earns more than $60,000 per year, do not think that earning a higher income will magically reduce stress in your life. In fact, this study shows us that earning income above $60,000 may actually increase your likelihood of experiencing stress.
  • I'm not advising you to earn less money, of course. Rather, this is a reminder (to all of us) that earning more money is not the solution to relieving stress or increasing emotional well-being.
  • If you don’t agree with the findings of this study, ask yourself this question: was I less happy when I made $20,000 less per year than I do today? Will I be happier if/when I earn $20,000 more per year than I do today?

If your family earns more than the $75,000 of income (as most of you reading this post do), what if you choose to live as though your family earns something like $100,000 per year? Just think of the possibilities:

  • How quickly you could be 100% debt-free.
  • How much money you could give to your church and/or other charities.
  • How much more time you will be able to spend with your children and grandchildren.
  • How much less stress you will experience in life.

1) Kahneman paper.
2) US Census Bureau income statistics.