Money’s relationship to happiness is an age-old topic. It’s something that I thought about often as I climbed the corporate ladder. I was trading more and more of my time for money, saving much more than I was spending, and my net worth was growing faster than I ever imagined.
I asked myself 2 questions:
Will a higher income make me any happier at this point?
Do I need a higher net worth before I can reach peak happiness in life?
Before we get into the PathwayToFI way of thinking on this, let’s take a look at what research has shown.
2 What do the experts say about money and happiness?
Experts can’t seem to agree about how much money it takes to be happy.
The challenge is that humans are complex. We all think differently. We have individual personalities. We also have individual life circumstances that shape our goals, dreams, and perspectives on life.
Studies look at averages, and very few people represent the “average”.
1.1 Income vs. happiness studies
The first study that brought this to my attention was conducted by Princeton researchers in 2010. It identified a salary of $75k per year as the plateau for happiness. Taking inflation into account, this would be a $100k income in 2022. They didn’t see any increase in day-to-day happiness as income increased from there.
Assuming you don’t live in an expensive city like New York or San Francisco, this seems like enough money to take care of some of life’s common problems. You could also afford some of the fun activities in life on this income. This assumes
Car isn’t working? Pay a mechanic to fix it.
Tooth pain? See a dentist.
No time to clean? Hire a service.
Too tired to cook? Take the family to a restaurant.
Kids into zoo animals? Buy a membership.
A 2018 study by Purdue and University of Virginia researchers made similar conclusions. They also differentiated between day-to-day happiness and overall life satisfaction. Day-to-day happiness plateaus around $75k, but life satisfaction levels off at $95k per year. While this sounds like an agreement with the 2010 study, when inflation is factored in it seems like this plateau actually declined in the 8 years between the two studies.
In a 2021 study, a researcher from the University of Pennsylvania studied incomes ranging from $15k to $500k. Happiness did not level off at $75k in this case. Instead, he found that both day-to-day happiness and overall life satisfaction continued to increase across the entire range.
The increase in happiness was linear on a logarithmic (nonlinear) income scale, however. This means that the higher a person’s income was the larger the increase needed to be in order to improve happiness by the same amount. A good way to look at it is that happiness increases in a straight line every time a person’s income doubles.
1.2 Net worth vs. happiness studies
A 2018 study by Harvard looked at two separate samples of millionaires. The researchers did not find a significant difference in happiness across income levels in this case. They did find an increase in happiness for those with a net worth of $8 million or more, but the difference was small. People with a net worth of $1-3 million were almost just as happy on average as people with a net worth over $8 million, in other words.
I can’t find a net worth versus happiness study of people with less than a million dollars. If there was one, I would expect to see a large increase in happiness from negative net worth (debt) to positive net worth. I would expect smaller, but significant increases in happiness as a person’s net worth hits milestone numbers such as $100,000, $500,000, and $1,000,000.
According to the Harvard study, the $10 million milestone doesn’t have a large effect. So it seems there would be a flattening out of happiness that occurs somewhere below $1 million.
2 Money vs. happiness curves
What does this mean for us? Can we turn this into something practical and actionable?
Let’s take the research and insert some logic as I did for net worth below $1 million. Then we can draw intuitive happiness curves for income and net worth that help us to determine when we have “enough” for peak happiness.
The goal of personal finance is to make enough, and then save enough to do whatever you want with your life.
2.1 The PathwayToFI income vs. happiness curve
Our income vs. happiness curve starts at $20k. This is near the poverty line for a married couple.
Note: You can adjust incomes in Figure 1 up or down by $5k per person to account for family size.
Happiness is about as low as it can be at the poverty line. You’re struggling just to keep a roof over your head and food in your stomach. We’ll give this a happiness level of 1 on a relative scale of 1-4.
Happiness increases linearly every time income doubles, according to the University of Pennsylvania study. I can believe that into the low six figures of income. This takes us up to a relative happiness of 4 around an income of $160k for a family of 2.
In my estimation, happiness peaks somewhere in the $150-250k income range. This isn’t because more money itself will make you less happy, but because of what it usually means for your daily life when you’re earning above this level.
For many people, this income range represents a high level of responsibility and leadership in their career. Income beyond that level comes with greater stress, the pressure to work longer hours, and less time to take care of mental and physical health.
This is exactly what I experienced as I moved to higher levels of corporate leadership and responsibility.
Higher income than this is nice to have, but it isn’t needed to live a happy and comfortable life. There is already plenty to live an upper-middle class lifestyle while saving for retirement, giving charitably, and accomplishing practically any money goal that you put your mind to.
Happiness slowly falls off above the $150-250k range, and then takes a deeper dive somewhere around $400k. This article by the Financial Samurai provides evidence from the perspective of an ex-investment banker and some insight into the lifestyle of Goldman Sachs analysts, who can reach this income level in their 30s. There is a ton of personal sacrifice required to get there, and as the article explains, mental and physical health plummet as a result.
There are other industries and businesses that aren’t as extreme as this example. So the decline in Figure 1 is drawn shallower than the Financial Samurai article suggests.
But we are usually talking about CEOs and business owners who have many demands on their time and the stress of making profit and loss, hiring and firing, and large investment decisions daily. This is what comes with peak achievement of power and status. It is not the recipe for peak happiness.
Here’s one more observation from my childhood about ultra-high income families:
I grew up as a middle-class kid in a very wealthy area near Scottsdale, Arizona. The richest kids that I knew did not have happier families. In fact, it was quite the opposite. They rarely saw their fathers, if not both parents, and they relied too much on money to derive short-term happiness and status.
A strong memory from high school was when I went to the mall with a rich friend and his even richer buddy from Scottsdale. We stopped at Richie Rich’s mansion, where the only adult I saw was his nanny. We drove his brand new Mercedes SUV to the mall. The conversation between the rich friends was almost entirely about the things they had and did with their parents’ money. Richie Rich pulled out a couple of hundred dollar bills at the mall and impulsively bought a watch and some cologne. Then we drove around a little to show off his car to random people in the parking lot, and that was it.
The money these kids had may have made me a little jealous sometimes. But their family bonds were not as strong, and their lives were more superficial as a result.
2.2 The PathwayToFI net worth vs. happiness curves
Construction of our net worth vs. happiness curve begins by recognizing that our expectations for net worth change as we move from early career to late career and into retirement. Therefore, we’ll need more than one curve for various life stages.
We could have made this distinction for the income vs. happiness curve also, but the difference would be less dramatic than it is for net worth. So we kept it simple.
People in their 20s, who are just starting out in life, have less expectation for net worth and a higher happiness baseline at lower levels of wealth. This group is represented by the green curve in Figure 2.
People in their 30s-50s are mid-to-late career. They now have higher expectations for wealth as they see their peers showing off wealth and earning higher incomes. They are also starting to think about retirement and whether they will be prepared financially when the time comes. This group is represented by the blue curve in Figure 2.
Retirees are also on the blue curve. They no longer have employment income, and are reliant on social security, pensions and retirement savings. Rather than making comparisons at this point, the financial component of their happiness comes more from their level of comfort that they will not run out of money.
This is all personality-dependent, of course. It isn’t a one-size-fits-all. But you can probably look at these lines, chart where you have been and where you are now, and agree this is about as accurate as we can get without looking at individual people.
Now I can explain the thought process behind these curves.
At suffocating levels of debt and negative net worth, mid-career through retirees are in a bad place for happiness.
It may be a $100k+ student loan that seems like it will never go away. Sometimes it’s oversized mortgage and car payments that leave no choice but to rely on credit cards to buy groceries every month. For others, it’s a million-dollar loan on a business that is losing money with no end in sight.
This situation—without significant savings and assets on the other side of the balance sheet—is a bad spot to be in for any length of time. Financial stress leaks into relationships and may lead to bankruptcy or divorce. I don’t know anyone who got to this point on purpose or is happy to be there.
We’ll call this a happiness level of 1 on a relative scale of 1-5.
For 20-somethings, this situation doesn’t feel as hopeless. Time is on their side, along with optimism that their career will go well and everything will be fine as soon as they earn more money. This keeps their happiness from dropping too low. We’ll give them a 3 out of 5.
Of course, if the situation continues into their 30s they will drop toward a 1 on the blue curve!
Digging out of debt and into a positive net worth is greatly satisfying! People who have achieved this are proud of their accomplishment and hopeful for the future. If you have ever listened to a “debt-free scream” on the Ramsey Show, you can hear the happiness in their voices. They now have disposable income and the ability to save and invest—probably for the first time in their life!
For people in mid-career and beyond, this is a huge bump in happiness, as shown on the blue curve. For those in their 20s, this is also a great accomplishment and they are seeing the progress that they envisioned. But the happiness increase is smaller because of the higher baseline to begin with.
Savings and investment have now kicked into gear, and after a little bit of grinding they’ve reached $100k in net worth. That’s some real wealth!
For people in their 20s, the steady increase in happiness continues. For those in their mid-careers and beyond, the slope is now more gradual.
Around $500k, the two groups hit the same happiness level. Both are now feeling financially secure, and Financial Independence (FI) is in sight!
Now they hit the $1 million mark, and we get into the 2018 millionaires study by Harvard. This is the milestone that most people only dream of!
Your FI number is defined as the amount of money that you would need in order to live comfortably on the income from your investments for the rest of your life. Most people’s FI number is somewhere between $1-10 million depending their desired lifestyle. This is the approximate range where peak happiness is achieved, and the happiness slope is very gradual around this point.
As far as net worth is concerned, I believe peak happiness is somewhere between your FI number and 25% above that. A person who considers themselves financially independent at a net worth of $2 million will be happiest with $2-2.5 million. The extra 25% might help you sleep better through stock market fluctuations. It might allow you to have a once-in-a-lifetime experience that you didn’t calculate into your FI number, but will cherish for the rest of your life. It also gives you some money to play with for legacy planning and charitable giving that can bring great satisfaction later in life.
Happiness might decline slightly beyond $10 million for a couple of reasons. More money brings greater responsibility, and typically more “stuff” to manage—homes, vehicles, businesses, taxes, trusts, charitable foundations, etc. It can also bring out greed and division between family members, pushing them apart rather than bringing them together.
3 Summary
Happiness has much more to do with relationships, health, and environment than it has to do with money.
Don’t take the happiness curves in this article to mean that you can’t be happy if your income or your net worth is low. You absolutely can!
You just need to control what you can. And one thing you have the ability to improve about your life is your financial situation.
Research is inconclusive. However, it confirms that happiness improves with income—up to a point. It has also shown that happiness cannot be improved much by growing net worth beyond $1 million or so.
This article adds logic to the available research, and presents happiness curves for income and net worth. Through this discussion, two conclusions were made:
- Happiness peaks in the $150-250k income range for a family of 2
- Happiness peaks when net worth is between your FI number and 25% above that
Do you agree with the research and conclusions? If not, I’d love to hear your thoughts!
Where are you on the happiness curves? Do you have a plan to reach “peak happiness” by these measures?
If you enjoyed this article, I have another set of happiness curves for you in Debt Can Be Useful or It Can Destroy Your Happiness.
If you are still at the Trailhead of your financial journey, looking to earn more, get out of debt and begin building wealth, read this article next. If you are already well on your way in your career and wealth-building journey, there is plenty more for you here.
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