‘Have you ever wondered how much money you need to be happy?

Psychologists have been trying to answer this question for decades.

Today’s BIG IDEA—Research shows that happiness increases with income level until your basic needs are met, and then doesn’t increase your happiness much after that. In some cases, more income may actually decrease your happiness.

The exact amount of money will differ from person to person, but taking some time to consider how much money you really need to be happy could affect the rest of your life. 

Today I will provide you with some studies and guidelines that will help you get closer to answering this question for yourself.

In late 2011, my wife and I began our 7-year journey to get out of debt. I plan to do a future post detailing that experience, but the process of living on less while reducing debt caused us to reconsider what we needed to be happy, so I began reading more on the topic.

I now believe that understanding the relationship between money and happiness is a key personal leadership skill, and essential for psychological well-being.

Research from Princeton and Purdue on Income

In a 2010 research study from Princeton University, psychologist Daniel Kahneman and economist Angus Deaton showed that happiness generally rises until all your basic needs are met. After that point, the relationship between income and happiness becomes much weaker, and can actually decrease.

Kahneman and Deaton found that well-being increases until about  $75,000 annual income. (This figure is an average for the US only).

And just so I mention it, they also found that poverty clearly has a negative effect on life well-being.

Why should we care what Kahneman has to say?

Despite being a research psychologist, Kahneman won the Nobel Prize in Economics in 2002. The American Psychological Association awarded him the prestigious Outstanding Lifetime Contributions to Psychology in 2007. He was also the recipient of the Presidential Medal of Freedom from Barack Obama in 2013. Kahneman details much of his research in his 2011 bestseller—Thinking, Fast and Slow.

A follow up study from Purdue by organizational psychologist Andrew Jebb analyzed Gallup data from 1.7 million individuals across 164 countries. They found that $95,000 per year seems to be the optimal income for life satisfaction, which is slightly different that emotional well-being. Life satisfaction is an overall assessment of how one is doing in terms of life goals and comparison to others, whereas emotional well-being pertains to one’s day to day needs.

Experts agree the relationship between income and happiness is complex and difficult to pin down, but these studies do provide us with some guiding principles and a good starting point.

More Research on Money and Happiness

I just finished reading Stop Acting Rich by University of Georgia professor Tom Stanley. He has perhaps done more research on millionaires and decamillionaires than anyone. One key finding from his surveys is that many people with very high incomes spend nearly everything they make.

Often people will simply continue to increase their lifestyle as their income increases without giving it much thought. They keep moving the goal posts. This can increase the temptation to take jobs that pay more, but decrease quality of life.

As one friend recently told me—he took a promotion to a job he doesn’t like nearly as much and now has much less time and energy for his young children, and much more stress. We can easily fall prey to the thinking that more pay means we should automatically take the job.

In many cases, we could probably make significant cuts in our monthly spending without sacrificing happiness—and avoid the need to work longer hours or stay at jobs we don’t enjoy.

Another classic psychological study in 1978 looked at happiness levels of lottery winners and found that the thrill of more money usually wears off quickly. Even a massive increase in their income did not lead to long term increases in happiness.

So, what can you do with all this research?

Turn information into action

Here are some steps you can take to better define your income needs and improve your well-being related to money:

  1. Define “enough.” This is absolutely essential. If you keep moving the goal posts—you will never be content. It’s also a vital conversation to have with your spouse. Frequently, partners will have very different ideas about how much is enough. Defining this goal will inform all of your other life choices about money. This process can take a long time to wrap your head around, so start some regular conversations on the topic. It’s also great modeling for your children not to keep increasing your lifestyle.
  2. Do a written budget. Research by financial guru Dave Ramsey shows that nothing is more vital to stabilizing your financial future than doing a monthly budget. Without knowing what is coming in or going out, it is unlikely you will ever make real progress. Having margin is key. Your income should cover your monthly bills, but then you will need money to cover unexpected expenses, annual bills, retirement savings, or vacations. This will help you get more clarity on what your real needs are. You may also be surprised as how much you spend in certain areas. I still remember the shock of realizing I was blowing more than a hundred bucks a month on Starbucks!
  3. Eliminate key areas of financial anxiety.
    • Have an emergency fund. Did you know that the US Federal Reserve survey from May of 2017 said that 4 out of 10 Americans don’t have enough money saved to cover a $400 dollar emergency?! Having an emergency fund creates incredible peace of mind. Most experts recommend 3-6 months of living expenses saved.
    • Get the right kinds of insurance. If you don’t have life insurance, disability insurance, or other essential things covered, you are only one life event from a major financial crisis. A great resource is Dave Ramsey’s Complete Guide to Money (I have no relationship with Dave Ramsey).
    • Have a will. In 2015, USA Today said that 64% of Americans don’t have a will. That means your loved ones will be faced with significant stress and time figuring this out when you die—maybe even court battles with other family members. If you have kids, this is critical. Your family will already be attempting to cope with your death, they don’t need the additional stress. Besides, you will feel great peace knowing this is handled.
    • Calculate your retirement now. Most studies show that Americans are not saving nearly enough for retirement. In fact, a recent story on CNBC showed that one third of baby boomers had nothing saved for retirement! I recommend you use Chris Hogan’s free retirement IQ calculator here: https://www.chrishogan360.com/the-improved-riq-tool-making-your-retirement-dreams-come-true/ (I have no financial relationship with Chris Hogan)
    • Avoid debt. You will always feel like you need more income if you keep accumulating debt. 

Suggested Resources

  1. 2010 Princeton Study on Happiness and Income in the US– https://www.princeton.edu/~deaton/downloads/deaton_kahneman_high_income_improves_evaluation_August2010.pdf
  2. Purdue global study on happiness and income https://www.purdue.edu/newsroom/releases/2018/Q1/money-only-buys-happiness-for-a-certain-amount.html
  3. Dave Ramsey—Complete Guide to Money
Parker Houston

Parker Houston

Opinions expressed are the authors own.
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