How Much Does Happiness Cost?

How much money do you need to be happy? Was Biggie right when he rapped Mo’ Money Mo’ Problems? Above what level of income would more money no longer increase your day-to-day well-being?

These are age-old questions (particularly the Biggie one), and the conventional wisdom on the correlation between happiness and income levels has long been defined by a highly influential 2010 study by the famous behavioural economists Daniel Kahneman and Angus Deaton. In that study titled, High income improves evaluation of life but not emotional well-being¹, Kahneman and Deaton found that happiness increases with income levels up to a threshold of $75,000 per year. Beyond this threshold, they suggest that people with higher incomes did not on average report being any happier than people making $75,000 per year².

I always believed there was something strange about the results of this study, but also thought - who am I to question the findings of a couple of Nobel Prize winners?

Well, based on a new 2021 paper by Matthew Killingsworth of the University of Pennsylvania, it turns out that making more than $75,000 per year might lead to more happiness after all.

According to Killingsworth, whose study was based on 1.7 million data points from more than 33,000 participants, money continues to buy increased levels of happiness well beyond $75,000 of annual income. His research found that people’s reported well-being increased as steeply past an annual income of $75,000 as it did below it.

Based on these findings, his conclusion stated, “higher incomes may still have potential to improve people’s day-to-day well-being, rather than having already reached a plateau for many people in wealthy countries.”3 The differences in the results of the two studies, along with the differences between emotional and evaluative well-being, are beyond the scope of this article. What I do want to focus on is why the $75,000 income/happiness threshold never made any sense to me in the first place. I’ve listed the top three reasons for this below:

Personality

Everyone has a different relationship with money. Some people are driven by it, while others barely consider it. As a financial advisor, and as someone who has spent a lot of time thinking about these issues, I see these differences crop up all the time with clients, colleagues, friends, and family members. To put it simply, not everyone needs the same amount of money to be happy; in fact, it’s often not even close.

I know some well-off people who fly first class and stay in five-star hotels every time they go on vacation. I also know other equally well-off people who are happy flying economy (ok, Premium Economy) and staying in modest Airbnbs. Some people’s idea of happiness is a $500 steakhouse dinner, others prefer a $20 plate of tacos.

This is not to say that any of the above choices are right or wrong. If anything, I’m a firm believer in the idea that people should use the money they have to do the things that make them happy. My point is that some people find happiness much cheaper than others.

Geography

Have you ever been to New York City? The land of $12 Bud Lights and $4,500 1-bedroom apartments. How about rural Montana? Or Idaho? Or pick any place in the United States that is not a major city. The same goes for Toronto vs. Thunder Bay, or London vs. Londonderry. Where you choose to live has a gigantic impact on how easily you can get by on $75,000 per year. In turn, I think it’s safe to assume that how easily you can get by on $75,000 per year has a huge impact on your reported levels of happiness.

The differences only grow starker when you start comparing the incomes and happiness levels of people living in two different countries. In the Toronto neighbourhood that I live in, it costs $1.5M to buy a semi-detached house with crooked floors. In Vietnam, I could retire tomorrow for that same amount of money. The bottom line is that where you live plays a big role in determining how happy you’ll be making $75,000 per year.

Wealth Matters More Than Income

The older I get, the more I realize that your annual income is a lot less important than your personal net worth (i.e. all of your assets less all of your liabilities). For example, who would you rather be: the unemployed person with a $100M net worth and no annual income, or the investment banker who makes $1M per year and has a net worth of $2M? I’d assume that regardless of your expectations on future rates of return or annual spending, most people would prefer to have $100M and would not be too concerned with their lack of an annual income.

Despite all of my above arguments, I don’t think Kahneman and Deaton’s original 2010 study was completely off base. Instead, I think both studies were insightful in their own ways. I don’t think happiness stops increasing after you reach $75,000 in annual income, but I do think the marginal gains in happiness get smaller and smaller as your annual income goes higher and higher. I began this article with a song lyric, so I’ll end it with another one, which I think illustrates my point. In 2007, when he was far more likable than he is today, Kanye West rapped Having money’s not everything. Not having it is. I couldn’t agree more.