$75,000 per year.
This is the number often referred to as the cut off where money will no longer bring you
any more happiness.
This is largely in thanks to a widely misquoted 2010 study conducted by these two gentleman,
Daniel Kahneman and Angus Deaton.
Since this was published, all manner of outlets have perpetuated this idea that conveniently
falls in line with other tropes like, money can’t buy happiness and money is the root
of all evil, mo money mo problem setc etc.
The issue is that it’s simply not true.
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The first clue for anybody misquoting this study should be in the title of the study
itself.
“High income improves evaluation of life but not emotional well-being”
What this means in plain English is that people with higher incomes don’t necessarily experience
higher levels of day-to-day happiness.
However long term, they do generally have a more positive outlook on life.
This phenomenon is most likely to be explained by the psychological theory of the hedonic
treadmill.
The hedonic treadmill is the observed tendency of humans to revert back to a relatively stable
level of happiness in spite of any major life events, positive or negative.
This is to be expected because of something psychologists refer to as the hedonic treadmill.
The hedonic treadmill is the observed tendency of humans to quickly return to a relatively
stable level of happiness despite any major positive or negative life changes.
Lets put it this way, if you win the lotto, you would probably lose your mind from happiness.
But as time passes and you’ve swiped your card more times tha n you can count, the novelty
of the situation will have also passed.
This is not because of entitlement, its just human nature.
This is your new normal.
The same effect happens in reverse.
If you get fired tomorrow, you will no doubt experience a drop in happiness but after you
break to the news to friends and family and find a new job you will eventually return
to a relatively consistent level of happiness.
Now there is bit more to this study than just one quirk of human psychology.
Another component most people tend overlook is the process by which these researchers
eventually came to their conclusion.
The study was conducted on 709,000 households which were asked to give details about their
income and then answer questions pertaining to human happiness.
How often do you feel stressed, How do you think your life will look in 5 years, how
often do you smile etc.
Their answers then produced a score on the Cantril Ladder, which is a general ranking
system, rating people from hopeless depression to thriving prosperity.
What was interesting is that this study suggested that the USA, where this study was conducted
actually did very well generally in day to day indicators like smiling, laughing, and
enjoyment of activities, but did very poorly in long term indicators like stress, where
the nation was the fifth highest out of all 151 other countries where similar studies
had been conducted.
Overall though the 709,000 households did quite well with an average Cantrill score
of 6.76 out of 10, which puts it into ninth place out of all studied countries, behind
only Scandinavia, Canada, Switzerland and New Zealand.
So don’t worry, the American spirit is alive and well.
But alas, here is what most people get wrong.
More income DID noticeably increase long term happiness indicators in the households being
studied, it just didn’t really have much of an impact on short term indicators thanks
to our good old friend the hedonic treadmill.
$75,000 a year is the generally accepted point at which money doesn’t become a day to day
struggle, but may still be a limiting factor towards more long term goals like buying a
house, getting out of debt, retiring or simply going on a nice holiday.
Or at least that’s the massively oversimplified albeit far more accurate conclusion.
Furthermore, Most people quoting this study still ignore 2 other major problems with this
number.
The variables and the timing.
In general science experiments, there are variables.
The dependent variable here, is the short term and long term happiness of a household.
The independent variable is the total annual household income.
However to have a direct correlation, in a perfect study, other variables must be controlled.
This study assumes that all households function exactly the same which is obviously not true.
To a young single professional with a low cost of living, no student loan debt, $75,000
per year would actually be extremely comfortable, but to a family of 5, paying off a mortgage
and student loans all the while living in Los Angeles, this income would be entirely
inadequate.
Another factor of concern that people tend to gloss over is the timing of the study.
These results were published eleven years ago, and since then, due to inflation, $75,000
per year would actually be around $90,000 per year, which starting to look like a much
higher benchmark for day to day happiness.
The one other problem with quoting figures from 11 years ago, particularly as it relates
to peoples personal finances, is the big elephant in the room, the Global Financial Crisis.
In 2008 and 2009 as this data was being collected, people were living through a period of ¬¬massive
layoffs, stock market drops, and foreclosures that hit the aspirational middle class particularly
hard.
Controlling for these unusual conditions means most households would usually have more day
to day satisfaction because they wouldn’t be hurting from watching all of their accumulated
wealth disappear.
Which is one of those problems that lower income households just don’t have.
You Can’t lose wealth if you never had any in the first place.
Now it’s a real shame that this figure has embedded itself into the public psyche because
it actually does a lot of harm.
A more recent study on exactly the same issue found a significant dip in the same happiness
metrics amongst households that earned over $75,000 a year.
A significant contributor to this strange anomaly was that people had thought they had
made it to peak happiness when the reality was very different.
So the question is then, how much money do you need to maximise happiness?
The answer is…
More!
And while this sounds like the most unsatisfying answer there is, it’s just about as accurate
as it gets.
The findings from all similar studies on this issue have found that overall happiness increases
with income, whilst negative emotions fall at similar rate without any perceivable plateau
at a particular income level.
It does however have a logarithmic relationship leading to diminishing returns of every additional
dollar.
What this means is that if a person went from an income level of $25,000 per year to $50,000
per year their happiness metrics might increase by 50%.
If someone added that same $25,000 pay rise to a salary of $250,000 , that impact would
be far less significant.
Instead they would need increase their salary by $250,000 per year to achieve the same increase
in happiness as the low income household.
Happiness builds with proportional increases in income, not nominal increases.
Hence the other reason that you need “more” income to be happy.
People were found to be most satisfied if they were receiving consistent, predictable
increases in their income through pay rises, promotions or business growth.
A constant upwards trajectory from a modest income was far more mentally satisfying than
income that is stagnant or declining even if it was several times larger to begin with.
Which makes sense, a constant supply of small rewards keeps that happy brain juices flowing.
The final thing to understand about this headline is how this data actually works.
When researchers analyse data they look for more than a simple correlation, they also
look for how significant the data is or how much of the outcome is explained by the relationship
between what they were studying.
In this case that would be the relationship between happiness and income, as opposed to
the millions of other factors that also contribute to happiness.
The researchers of the original paper found that this relationship accounted for about
37% of the expected variance, which is huge, but it still means 63% of people’s happiness
was determined by other factors.
These other factors are things like health, meaningful relationships with family and friends,
spirituality, and even things with a negative relationship with income like work life balance.
The upshot of this is that someone on a modest income could still be happier than a very
wealthy person, who was unhealthy, lonely, and constantly stressed over work they couldn’t
separate themselves from.
But let us know what you think, how much money do you think you would need to be happy?
The comments help out the channel and it would be interesting to see all of the different
opinions on this.
Thanks for learning How Money Works.