October 30, 2014

The Price of Happiness? Science Confirms It Is $75,000 Per Year

Money Can Buy Happiness - It Costs $75,000 Per Year

It turns out, science has proven that money can buy happiness. The price tag is a $75,000 per year annual income, which puts you about 50% higher than the median income in the United States. I think there is considerably proof from psychology that this is a moving figure because people want to feel richer than their neighbors. So perhaps a better way - and this is just a hypothesis - to think about it would be that people like to feel approximately 50% richer in terms of household income than the average American family. Image © Adam Gault/Digital Vision/Thinkstock

In a major peer-reviewed study from Daniel Kahneman and Angus Deaton from the Center for Health and Well-being at Princeton University, the great debate of psychology – can money buy happiness? – has finally been answered.  It turns out, it can up to a point.  This isn’t some quick news poll either, it is a serious scientific finding resulting from analysis of 450,000 responses, providing a significant sample size.

Defining the Two Types of Happiness

The study begins by defining two types of happiness:

  • Emotional Well-Being: The emotional quality of a person’s day-to-day experience including the frequency and intensity of joy, stress, sadness, anger, and affection that make one’s life pleasant or unpleasant.
  • Life Evaluation: The thoughts that people have about their life when they think about it, reflecting upon how “successful” they have been.

Money Buys Emotional Happiness But Stops at $75,000 Per Year

On the emotional well-being, a higher income does, in fact, buy happiness but the effect levels off at an annual salary of $75,000 per year.  Since we know the median American household, a family that is the definition of “middle class”, makes between $34,738 and $55,330 per year, this is a nice premium.  (If your household makes more than that amount, you are by definition not middle class.  That range is the point at which 2 out of 5 households are richer and 2 out of 5 are poorer than your family according to the Federal Reserve.)

That means psychological happiness in terms of day-to-day emotional well-being taps out at a pre-tax household income of $6,250 per month.  The study authors propose that since happiness is directly correlated with having time to spend with friends and family, care for sick relatives, and pursue activities about which you are passionate, income above this level permits all of those things.  Someone making $300,000 per year doesn’t have any more free time – and in fact may have less – than someone making the magical $75,000 per year.

Financial Stress Disappears for Most People at $60,000 Per Year

Just as important, the study found that an annual income of $60,000 per year, or $5,000 per month pre-tax, is the magic line at which financial stress disappears.  Once you cross that threshold, unless you just mismanage your budget or have a true tragedy (such as a very sick family member or child), you aren’t losing sleep at night over your finances.  (If you are, you need to read a book of personal finance.)

There Is No Limit to the Level at Which Money Can Buy Happiness for Life Satisfaction Scores

On the other measure of happiness – life evaluation – there is no limit to the joy money brings.  On average, people rate their life a bigger success if they have $100 million than if they have $10 million.

Much of this, I would surmise, is not a function of having more money but of the success in a primary occupation that leads to that level of wealth.  In other words, it isn’t the money that makes people thrilled with their life, since we already know their day-to-day experience doesn’t change past $75,000 in terms of emotional happiness.  Rather, it is the fact they landed the CEO job or sold their company to Wall Street or signed a record deal.  The money, in these cases, is a symptom, not a cause.

The study is called High income improves evaluation of life but not emotional well-being.  The link lets you download an Adobe PDF copy of the research findings.

P.S. Of course, this is when someone inevitably whines, “But what if I live in New York City or San Francisco?”  Well, if you choose to live in one of the handful of most expensive zip codes in the United States without having an occupation that pays you enough to survive, stop being a child and own the choice.

For a vast majority of Americans, a $2,000 a month mortgage payment provides a 3,000+ square foot home with crown molding, a two-car garage, and maybe even a private swimming pool.  You would be able to have these things if you moved but you haven’t chose to do so.  Complaining that $75,000 isn’t sufficient is like whining that you only want to stroll the beaches at night but you hate that you can’t get a tan.

  • Michael Clay

    Haha…I like that analogy at the end. So true!

    On another note, as someone who makes more than $75K and has a sick child, I can tell you for sure that there has been a lot of finanical stress the past 3 years. It is humbling going from driving a $30K BMW to a $5K Ford Taurus but today I feel I am better off because of it. This experience has taught me a lot about myself and really opened my eyes to what is truly important.

    The good news is that my son’s treatment ends in November and life is slowly reverting back to normal with school and work for the whole family. But with the lessons I was forced to learn the past few years on saving and investing I dont think I will go back to driving a BMW anytime soon. I would rather buy shares of BMW every month instead of paying for a car that depreciates faster than I can pay it off. That would make me truly happy!

    • http://www.joshuakennon.com Joshua Kennon

      Michael, I’m so glad to hear about your son’s treatment! The good news is, when things get back to normal, with a higher-than-average income, it should be a lot easier to make up the lost ground that went to medical bills, especially if you’ve cut your expenses.

      I’ve written about it a lot over the years and I’m glad you’re one of the people who “get it”. The whole point of this investing thing is not to get more money for its own sake. It’s to do what you want with your time and spend it with the people who matter to you.

      And you have a huge advantage over one of my favorite investors, Charlie Munger. 1.) Your son is recovering and 2.) Your age. Charlie was older than you are and his son lost the battle (only two or three years afterward they developed the cure for his particular form of lymphoma). The medical bills and other problems had him bordering on bankruptcy and he would wander the streets of Pasadena crying over his boy. Oh, and he was divorced, remarried and had something like 8 more kids to support. He rebuilt from being broke, driving a beat-up old car (I think it was yellow? He talks about it still in some of his speeches), and all of that pressure, to a $1.75 billion fortune, traveling the world hanging out with his countless grandchildren and great-grandchildren as he donates money.

      Given your advantages, which means more time to compound and – far more importantly – the joy of having your son at your side while you do it, I say you go kick Charlie’s ass ;)

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