July 8, 2012

Only So Much Money Can Buy You Happiness

Marc Comtois

Bob Plain tweeted a link to a story on a study showing that the "comfortable standard" of income for being happy is, generally, around $75,000 in the United States. But whereas Bob indicated "$75k is the income Mendoza Line for affording happiness", that's a mischaracterization of what the research shows (granted, it was a character-limited tweet, so I don't want to take Bob too much to task here. In reality, I'm glad he pointed to the story). In short, $75K is the point at which making more money doesn't necessarily buy you more happiness. Happiness only grows incrementally with jumps in income and you can still be plenty happy with less than $75K .

Using Gallup data collected from almost half a million Americans, researchers at Princeton found that higher household incomes were associated with better moods on a daily basis — but the beneficial effects of money tapered off entirely after the $75,000 mark.

Why, then, do so many of us bother to work so hard long after we have reached an income level sufficient to make most of us happy? One reason is that our ideas about the relationship between money and happiness are misguided. In research we conducted with a national sample of Americans, people thought that their life satisfaction would double if they made $55,000 instead of $25,000: more than twice as much money, twice as much happiness. But our data showed that people who earned $55,000 were just 9 percent more satisfied than those making $25,000. Nine percent beats zero percent, but it’s still kind of a letdown when you were expecting a 100 percent return.

Interestingly, and usefully, it turns out that what we do with our money plays a far more important role than how much money we make.

The rest of the story gives examples that are kinda of the "no s**t" variety (eating chocolate all the time isn't as joyful as only every once in a while; giving to others generates more happiness than buying stuff for ourselves) and it seems to attempt (tenuously) to link so-called "underindulgence" as beneficial when enforced by government (citing New York's large-size soda ban). But it's a nice re-affirmation of something that seems sorta common sense to most of us: good thing science and the New York Times verified it!

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Unmentioned here is that income goes up, "necessities" go up. Dig out Tom Wolfe's "Bonfire of the Vanities", in the first chapter he offers the thoughts of a man (making 100,000 in the 70's)on his way to work, and why he is broke.

Posted by: Warrington Faust at July 8, 2012 3:52 PM

Bob Plain seems like a nice enough fellow, but I'm beginning to notice a pattern with him of mischaracterizing content. This is the fourth or so instance in as many months, which is surprising since he claims to come from a journalism background. I'm not going to accuse him of intentionally distorting, but he often seems to not *fully read* things, and the errors usually favor the progressive narrative.

On the topic of the source article, my significant other spent a year working for an extremely wealthy Democratic political family in DC. Not billionaires, but close. Money was their best friend and their worst enemy - they had few, if any, real friends (pictured in every room were the Obamas or Clintons, yet they never seemed to make it out to their events). The children grew up essentially without parents, and the little time spent with them was scheduled and superficial. They treated and paid "the help" miserably (no Christmas bonus - the economy, you see). It was not a happy life. I did not for one moment envy them or their lifestyle.

Posted by: Dan at July 8, 2012 5:16 PM

Posted by Dan
"It was not a happy life. I did not for one moment envy them or their lifestyle."

As with anyone, rich or poor, life is what you make of it. I am reminded of a very wealthy GF I had years ago. We were going skiing and I needed flashlight batteries, so I stopped at a K-Mart. She refused to be seen going into a K-Mart and stayed in the car.

Posted by: Warrington Faust at July 8, 2012 7:46 PM

Hawaii is ranked the number 1 happiest state in the nation for the 3rd year in a row according to annual The Gallup-Healthways Well-Being Index. I can testify we do smile all the time here in the aloha state especially knowing that this year 2012 visitor and tourist spending is on track to break the $14 billion mark.

If money has anything to do with happiness Hawaii has slipped from long held 1st place (2006, 2008, 2009, 2010) to 2nd place by 0.01% behind Maryland for having the most millionaires per capita in the country per annual Phoenix Marketing International wealth study.

A millionaire is defined by Phoenix Marketing International as: A household with $1 million or more in investable assets (liquid wealth). Excludes primary residence and real estate, business partnerships, employer sponsored retirement plans (401k, 403b) restricted stocks, etc).

Posted by: KenW at July 8, 2012 8:31 PM

Does more money make you happier? Yeah, it does. I heard Matt Allen the other night talking about the people who win the lottery and how miserable they are. Warrington mentions the "necessities" increase as you have more money. I'm guessing the word was in quotes because they're not really necessities, they're "wants". Looking at them as wants, they really then break the causation logic. If you're rich and want to live like you're not, I'm guessing you'll be plenty happy. If you're rich and want to live like you're richer, you'll be miserable.
Matt Allen referenced the lottery winners having few friends because other rich people didn't respect how the wealth was earned and people of lesser means just wanted a piece of it. My thought was, then don't live in a way that anyone knows you're wealthy. I know that if I were to no longer have to worry about money, I'd still live a fairly simple existence.

Posted by: Patrick at July 9, 2012 10:34 AM

I think that I read that only a small portion of households would be able to 'come up with' $2,000 in cash in a month in an emergency.

The group with the lowest likelihood of scraping together the money was actually at the bottom of the top 20% of income, making $75-125K a year.

People making that kind of money tend to have a fair amount of credit extended to them, which they use. They also tend to 'get ahead of themselves' and think they can afford things like new mid-range cars or big houses out in the 'burbs.

As someone who is in the 'bottom of the top 20%' category (we call it the 'middle class'), I'm under constant pressure from peers and family to do things like buy a larger single-unit home, drive a nicer car, or go on more vacations. The fact is that even at those levels of income, once the basics are paid-for, the retirement is funded, and a small amount is put towards savings, there's not enough left over to drive more than a small used car or live in a small duplex.

All around me I see people who make much less money live far more extravagant lives. At first I thought I was doing something wrong, but a few conversations with professional financial planners convinced me that I'm actually one of the few people in my age range doing things -right-.

Does money buy happiness? Honestly, doubling my salary or halving my taxes wouldn't dramatically change my life in a big enough way to warrant the work needed to do it. All it would let me do is pay-down the debt (cars, homes, school) faster than I do now. I suppose the story would be different if I was 50 and sitting on the results of thirty years of good planning, but I'm still too close to the starting line to have enough assets to avoid debt-instruments entirely.

Right now the thing that's keeping me from being happy isn't a lack of money, it's being able to get a contractor to actually show up at my house to take it. I've called no less than six people for some work in my attic, the job is 'too small' to make it worth their while. I have a feeling that this is a 'Rhode Island' problem... Everyone's complaining about lack of work, but when I'm waving cash in the air, it turns out that nobody really wants to get off their butt and actually do it.

Posted by: mangeek at July 9, 2012 1:17 PM

Posted by Patrick :
"Warrington mentions the "necessities" increase as you have more money. I'm guessing the word was in quotes because they're not really necessities, they're "wants".

Patrick, I think you are correct, but it can be difficult to distinguish. For instance, income goes up and friends change. Your kids' friends are going to private schools. You want the best for your kids and don't want them to feel left out. Suddenly, private school becomes a necessity. I'm thinking of a guy I know, self made real estate developer. For his kids URI was "as good as I had". Now, many years and many yachts later, he is paying tuition for 4 grandchildren at the Wheeler school and debating the wisdom of "selling off and buying back" if Obama is re-elected.

"Matt Allen referenced the lottery winners having few friends because other rich people didn't respect how the wealth was earned (obtained?)"

I think there is some truth in that. I know a guy who inherited an even million. Suddenly he was proclaiming himself a "millionaire" and believing he deserved some sort of deference. Our friends are mostly self made, although some got a significantly better start than others. They thought "who the h-ll are you, all you did was get born" and now you are doing nothing at all with what you got.

Posted by: Warrington Faust at July 9, 2012 1:47 PM

"At first I thought I was doing something wrong, but a few conversations with professional financial planners convinced me that I'm actually one of the few people in my age range doing things -right-."

And there in lies the rub. We have married friends. The wife is a medical professional and the husband a skilled tradesman. She has only ever worked part time and he reduced his hours to 32. All they do is cry poverty. Their only retirement is her 401K. They must be happy right? They have so much seniority at their jobs they could easily solve that problem but they're 'tired' of working. So I guess the plan is to depend on SS and her 401K if they ever retire. But hey, they must be happy right? I must be the unhappy one right... my wife and I stow away 30 percent each from our respective salaries for retirement. I guess I should be 'happy' that I'm capable of that.

Posted by: Max D at July 9, 2012 1:49 PM

"I know a guy who inherited an even million... believing he deserved some sort of deference"

"A million dollars! Now I can quit my job and sustain a humble lifestyle of home-cooked meals, a used subcompact car, and a two-bed apartment!" -Nobody Ever

Posted by: mangeek at July 9, 2012 2:06 PM

So much of this discussion reinforces what I've long believed. It isn't the money that really changes the person, it's the person themselves. If you're already lazy or a moron, the money isn't going to change you, it's probably just going to accelerate you in that direction. If you can be smart and responsible with money today, chances are you would be the same way with more of it.

My wife and I have had similar thoughts to what mangeek mentions. I see families in our neighborhood where one parent works full time and the other stays home with the kids, and they go on Disney vacations a few times a year, eat out 3-4 nights a week and have lavish holidays and birthdays. I wonder if I'm doing it wrong. Then you sometimes get a whisper of the debt they're carrying and realize they're screwed and I'm likely doing it (more) right by being responsible, living modestly and saving/investing for retirement.

I've heard some stats that indicate that only 9 out of 12 people have started saving for their retirement and only 11 out of 12 are saving enough. My question is what happens in 20-30 years when these people are looking to retire and they have nothing? They're going to look at me and complain that it's no fair. That whole no-tax 401k today just might find its way back into the taxation scheme. After all, why should I be allowed to have a comfortable retirement after lying low for 40 years while my Disney and cruise vacation neighbors don't even have enough for their property taxes and to put food on the table in their golden years.

Posted by: Patrick at July 9, 2012 11:12 PM

"My question is what happens in 20-30 years when these people are looking to retire and they have nothing? They're going to look at me and complain that it's no fair."

I suspect that they will vote to tax people like you and me, and to 'beef up' programs like Social Security and Medicare.

Posted by: mangeek at July 10, 2012 12:00 AM


Here is a thought; you save what you can save as compounding interest is your long term savor and try to live within your means not trying to keep up with the next door neighbors.

When I was first married my wife and I used to go camping in a tent at campgrounds for our vacations and on weekend throughout New England. At $0.75 to $1.50/night sure beat a $75/night motel room and we met some fantastic people; saved a lot of money, saw an awful lot of New England and had a lot of fun plus really got to know each other. But then our friends talked us into a full camper; people discovered camping, industry started marketing it and prices skyrocket as it became the in thing to do! Campgrounds became resorts $$$$.

As our jobs progressed with promotions, increased income and purchasing a house we continued to go camping and banked any saved moneys understanding that compounding interest was in our favor also we started over paying our mortgage by $5 each month which substantially reduced our debt and we never maxed out our credit cards and always paid off the balance in 30-days to reduce interest charges.

If you can’t pay for it in 30-days you don’t need it!

We were very happy having great parties at our home, attending the arts, theater, concerts, nightclubbing, traveling, visiting Hawaii and going cruising in the Caribbean, visiting Disney and finally moving out of RI and retiring to Hawaii.

Set up a plan to manage your money and invest it, controlling your debt and stick to it. It will pay off in the long run when you get ready to retire.

Posted by: KenW at July 10, 2012 1:24 AM

About 10-15 years ago there was a best seller titled "The Millionaire Next Door", it re-ignited the use of the term "frugal". "Frugal" became a buzzword. Those who think about such things will recall that all ads aimed at businesses stressed the word "frugal".

A few "factoids" that I recall, millionaires buy one house and "add on" as the family grows; they tend to buy their clothes at J.C. Penny (wins all awards, Consumer Reports, etc); they tend to drive a used Mercedes.

Posted by: Warrington Faust at July 10, 2012 9:39 AM

Monetary happiness means enough money to keep a roof over your head,enough money to pay for utilities and nutritious even though inexpensive and politically incorrect food. A little to put aside for savings.

Climate appropriate clothing,transportation,basic medical and dental care,sheets,blankets,towels,mattresses,and any other things we would consider basic to living in our society today.

This does not mean cable tv(which I don't have and don't regret)cell phones or any phones(I lived for around five years of my adult life without a phone) or any extra fancies like those.

Posted by: helen at July 11, 2012 3:06 AM
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