Money doesn’t buy happiness, but money might make you think you are happy.

My first ever post… hmmmm, this was a tough one.  I thought I would start small and  in line with the goals of this blog take on the old adage “Money doesn’t buy you happiness”.

Is this fact or just another phrase that caught on over time, just some good old fashioned lore?  Like  “drink 8 glasses of water per day” which, as it turns out has little medical basis and gets plenty of my patients into trouble.   For those interested, here is how to get to 8 glasses per day.

This always sort of made sense growing up.   As I got older and started having friends with money and also realized some of the problems that my family members with money kept well hidden, my opinion on the subject began to change.

But something inside also felt like it didn’t pertain to those who made “real money” like doctors right?  At the very least I wouldn’t have to worry about money and pinch pennies like my family did growing up, which was a constant source of strife (that I’m now grateful for and will post on eventually).

The subject of money and happiness is admittedly complex and rustles up deep opinions in conversation and in academia.   Many bloggers claim and the word on the street is that “Above $75,000 annual income, happiness doesn’t increase.”  Period….

Well, that doesn’t add much more to the knowledge base on money and happiness than the original statement “Money doesn’t make you happy”.  It addresses only an income level.  So many questions come to mind:

Is that total household or personal?  What is that based on; a study, anecdote? When was that discovered, was it 1950 because inflation has done a few things since then to the $75K number? What is meant by happiness because our definitions probably differ? Is there a level above $75K that wasn’t measured and maybe happiness does go up?  Is there a level below $75K at which happiness goes down? Etc, Etc….

So what does the data say?

To the literature search! A simple search on Pubmed (Google for the science community) with the terms “happiness and money 75000” gets a single hit, which as it turns out, is where the money is.

Swingers Money

The paper is  by Daniel Kahneman and Angus Deaton and is entitled High income improves evaluation of life but not emotional well-being.  Lets break down the paper using information from the article itself.

Purpose:  The aims of our analysis were to examine the possible differences between the correlates of emotional well-being and life evaluation, focusing in particular on the relationship between these measures and household income.  (What the hell does all that mean?  We’ll get to that in a bit, keep reading, it gets simpler)

Methods: Analysis of 450,000 telephone responses of US residents surveyed in 2008-2009 to the Gallup-Healthways Well-Being Index (GHWBI) .  What was specifically pulled from the poll data were measures of “subjective well-being”.  The authors separate subjective well-being into 2 groups:

  1. Emotional well-being – (aka Hedonic well-being or experienced happiness) Refers to the emotional quality of an individuals everyday experience-the frequency and intensity of experiences of joy, fascination, anxiety, sadness, anger and affection that make one’s life pleasant or unpleasant.  These were measured as dichotomous variables (yes or no answer) based on experience the day before the phone interview.  For example: “Did you experience joy a lot of the day yesterday, yes or no?” or “Did you smile or laugh a lot yesterday, yes or no?”
  2. Life satisfaction – A person’s thoughts about his or her life.  Measured using Cantril’s ladder.

What are the Results?

This graph summarizes the data nicely.

Some definitions to unpack the graph:

  • Measures of Emotional well-being
    • Positive affect: Average of 3 survey items (reports of happiness, enjoyment, and frequent smiling and laughter)
    • Blue affect: Average of the 2 survey items worry and sadness (note converted to Not blue in graph)
  • Measure of Life satisfaction
    • Cantril’s ladder
  • Stress: The answer to the yes or no question “Did you experience a lot of stress yesterday?”

Income is on a log scale.  (As a nerdy side note, the log scale makes sense compared with an absolute scale because a $1000 income change impacts a low income person more than a high income person therefore its the percentage change (not the absolute value that matters.)

The authors conclude:

“We infer that beyond $75,000/y, there is no improvement whatever in any of the three measure of emotional well-being”

OK, so basically objective measures of well-being satiate at $75,000 per year. But here is the second conclusion, just as interesting:

 “In contrast there is a steady rise in life-evaluation with log income over the entire range; the effects of income on individuals’ life evaluation show no satiation, at least to amounts well over $120,000/y.

Here are hypothesis the authors put forth to explain the 2 conclusions.

  1. Further increases in income no longer improve individuals’ ability to do what matters most to their emotional well-being, such as spending time with people they like, avoiding pain and disease, and enjoying leisure.
  2. Its possible that above $75,000, the increased ability to purchase positive experiences is balanced, on average, by some negative effects and possibly a reduced ability of the affluent to savor small pleasures.

Few miscellaneous points:

  • Most people were satisfied with their lives with 85% experiencing much positive affect.
  • Blue affect was reported by 24% and stress by 39%
  • The US ranks 9th in the world on Life satisfaction
  • Poverty (defined here as <$1000 per month or 10% of households) exacerbates the effect of adverse circumstances compared with those income above $3,000 per month (2/3 of households).

My thoughts (’cause…..otherwise, why blog?)

This has become one of the seminal papers for laymen (like me) on the subject of money and happiness.  Daniel Kahneman is a major author on the subject of happiness and a quick pubmed search for his name gets 60 hits on mostly peer-reviewed journal articles.

I’m not sure I conclude from the results that money doesn’t buy happiness.   While its true that objective measures of happiness plateau around $75,000, life evaluation continues to increases with higher incomes.  The question then becomes “Is increased life evaluation a good endpoint and something worth increasing?”

Unfortunately, the authors do not make firm conclusions on that topic.  In fact, the authors conclusion is the title of the paper: High income improves evaluation of life but not emotional well-being.  They do not conclude that life satisfaction is more or less important than emotional well-being.

Perhaps it is inferred?  Meaning, wouldn’t one rather possess all the objective measures of happiness rather than just think he/she is living the life he/she wants?  Wouldn’t I rather know I am a good physician because my outcomes are measured and are good than think I’m Dr. Jonas Salk and have abysmal outcomes.

Polio Vaccine

An important caveat for high income earners (that’s you physicians).  The methods of the paper were such that income for each respondent was compared to the average income of the zip code in which they resided.  If the respondent income differed by 2.5 times the zip code average, the respondent was excluded so to eliminate outliers and implausible income reports.

This could create a problem as the results may not be applicable to those at the very high end of the income spectrum because they were not well represented in the study.  Now, if we all lived in zip codes with similar incomes this wouldn’t be a problem, but that seems unlikely.  Similar to a drug randomized trial not including patients over age 75, we just simply may not know how it applies to that population.

Also, the highest income limit of the study was >$120,000/year with little mention of how many had income above that level.  Physicians typically make more than this upper limit (just above $200,000 in 2016), so again, results may not be applicable.  Indeed, data was not really gathered on those with income typical of a physician.  Which begs the question, what if a similar study was conducted with only high incomes, maybe only physicians?  Would one see more emotional well being at higher incomes, less, who knows?

A small tip of he cap to inflation.  Using the CPI inflation calculator , $75,000 in 2008 dollars when the study started is now $87,000 dollars. Not a huge difference, but with another decade we may have to recalibrate our “happiness threshold income” as a society.

There is also the possibility that making more than $75,000 will allow one to spend the money on things that do increase happiness such as charity, child education savings, a new business, activism.  Perhaps the study suggests that on average more money isn’t important, but to the individual, it could make a huge difference.

One last point which may be the most important for me.  This lack of emotional well-being might not pertain to young supersavers like the FIRE (Financially Independent Retire Early) crowd because the extra income is buying lots of (potential) future happiness, which may increase present happiness and certainly increases the “area under the happiness curve” of life if early retirement is what makes you happy.  Personally, I get great satisfaction from putting money into retirement each month and can guarantee you that I’m happier being able to put more in there than less.

For the FIRE crowd, maybe at or just above $75,000 annual income is a good number to reach for once you pull the trigger for early retirement.  That comes out to about $1.9 million nest egg if using the 4% rule.  Totally achievable with a physician income for early retirement and for many others just retiring at a later age.

What do you think?   Do you feel happier with more income and if so are you manifesting all the outward signs of happiness?


14 Replies to “Money doesn’t buy happiness, but money might make you think you are happy.”

  1. That’s a great breakdown of the landmark, oft-referenced study. I think I’ve been guilty of quoting the quick-hit headline version of the study at times, but I’ve also recognized and written that happiness doesn’t increase much at incomes above $75,000. You get greatly diminished returns for the additional dollars.

    Like others, I’ve largely equated what they studied (income) with a similar level of spending, even though they’re obviously not one and the same. But the data will show that in this nation, with a savings rate of less than 5% on average, most people are spending the vast majority of what they earn. I think at income levels under $100,000, it’s not far-fetched to assume annual income and spending are tightly correlated.

    I did not know they threw out any incomes greater than 2.5x the local average. Many of us physicians would not have had our data included. That’s rather silly.

    I have a salary roughly six to eight times the local average, and you can bet that makes me happy. But I don’t think spending much more than $75,000 a year would make me a whole lot happier. Maybe a little, but we’re talking maybe 5% or 10% “happier” if we could spend double or triple that.

    Spending $75,000 and giving away $75,000 a year would more likely make me happier than spending $150,000, and I believe there is evidence to support that notion, as well.

    I’m much happier knowing I can retire at any time with the savings we’ve got from eleven years of post-residency work. Spending significantly more would take FI away from me. No thanks.


  2. Color me enlightened about the details of this study. I had been familiar with the $75,000 happiness threshold, but admittedly had not read the nitty-gritty details.

    Hypothesis #2 struck me as strange but interesting. Those earning over $75k may have reduced ability to savor small pleasures? I find it hard to believe that simply making more money somehow decreases the ability to enjoy such things.

    For me, money is a means to an end. I don’t derive happiness from money itself, but rather what I can do with it.

    Good luck with the future blog!
    Dr. C

    1. Yeah I got into this study a few years ago after seeing it quoted so much when it was published. Thought I’d put my thoughts on paper. Ive got my annual upcoming lecture to medstudents on finances to it was a good review for me before I quote it to them again.

      Regarding hypothesis 2, I have a paper on that and will post on it since you’re so interested.

      Great point about money as a means to an end, I was trying to make that point too, but I think many people miss it when thinking about money. To me, money is like stored up potential energy that my wife and I generated saved up the batteries of various assets. Just let it change form into whatever you want. The dollar sign may as well be a big letter E as far as I’m concerned.

  3. Good point about income = spending in the US. When reading the study I was also assuming that was the case (sadly). That means that the $75,000 ($86,000 with inflation) is probably a good point to aim for annual income in retirement (early or otherwise) assuming one will spend all of most of it. Although perhaps less would be enough for these reasons:

    1. Less tax burden if not paying income tax but rather Long-term capital gains, qualified dividends and keep income below the lowest tax bracket (incidentally around $75,000).
    2. In retirement, especially if not super early, there are less costs (kids, college, job, mortgage) so might not need all 75K.
    3. The FIRE crowd is more frugal/minimalist than average, so maybe our 65K will stretch to a normal 75K.

    To your point on spending more returning back less happiness per unit spent above an income threshold compared with units below that threshold. Totally agree, I think that it the marginal utility of money at work.
    Btw, there is a great post of that topic by The Happy Philiopher:

    Thanks for my first comment PoF!

  4. Daniel Kahneman and Angus Deaton both have Nobel Prizes, so it’s hard to argue with their major conclusions. One potential issue could be the generalizability of the results to each individual person’s situation.

    I suspect that attendings have higher happiness than residents, but that might have to do with lifestyle and work hours more than salary…

    1. I wouldn’t argue with the conclusion, the authors are well established as you said. However, I think the conclusion is vague regarding money and happiness. It seems that the emotional well being plateaus but the life evaluation increases. I probably don’t know enough about the field to determine if life evaluation is important.

      Importantly, I agree that generalization of results may not be applicable and that individuals may not satiate at higher levels for a variety of reasons. This is anecdotal but makes sense from seeing what people do with money to increase happiness other than self-spending.

      Appreciate the comment!

    1. Definitely less stress, especially if the money is used in the right way, ie debt is paid down to manageable levels, nest-egg is on its way to becoming just right, donations, passive income, etc. The delayed response is because your comment went into my spam folder, weird.
      Thanks for the comment DDD

  5. I too have read the conclusions of this study but did not know the details. Good article. I often think would I be happier if I won a big powerball say 200 mill. Hell yes😀 But who knows.

    1. 200 million! Well, taxes take half for prizes I think so only a paltry 100 milly. So with only 100 million maybe you’d be happier, maybe not? I think there is literature on the topic of happiness and giant financial windfalls. I believe most people return to a baseline happiness “setpoint” we all seem to have.

      Turns out that might work in the other direction too. I cases of devastation such as personal injury, massive financial loss etc many return at or near baseline given some time.

      Hope you got some insight. For me, the article helped me gain gratitude for what I do have.

  6. Very interesting data, and well summarized. Personally, I think “happiness” has a great deal to do with your mindset, which is colored by your personality, upbringing, myriad social factors, etc. For instance, one individual may derive great satisfaction from forging strong interpersonal relationships while another experiences the same level of contentment from making a large contribution to a 401(k) in preparation for an early retirement. In summary, “happiness,” like pain, is subjective and therefore very individualized. Hard to capture that in a study, well-constructed though it may be.

    1. Well said AC. Couldn’t agree with you more about the personal nature of happiness. This is why I have a problem with studies like this that may be relevant on average but not for the individual. It’s a problem you and I have discussed regarding oncology clinical trial data applicability to the individual patient.

      I also think factors influencing happiness, as you mention, are myriad. Indeed, happiness may be more related to factors out of our control. This has been well researched as an intrinsic happiness set point. I think I’ll have an upcoming post on some of the literature I’ve read no that subject.

      Also, for clarification, putting money away for early retirement doesn’t make me happier than relationships. However, compared to putting less money away, I would rather put more and am probably happier for it. If I had to chose between a life of social isolation with a large nest egg vs deep relationships with a meager treasury, I chose the later! (But why not go for both, they aren’t mutually exclusive, right?)

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