Two things happened in the early 1970s that weigh on my conscious when I think about them today: Richard Easterlin, looking at the relationship between income and happiness, found that more money does not always correlate with greater happiness. Around the same time, my parents, newly married, bought a two and a half bedroom apartment in Manhattan that became my childhood home.
Easterlin’s 1974 paper revealed an unexpected correlation in the data: rich countries don’t become happier as they get richer, though rich people within a country tend to be happier than poor people. This phenomenon became known as the Easterlin Paradox. Further academic studies have shown that happiness increases with income until a point at which it plateaus — a threshold after which more money does not make people happier. As long as I’ve known about this, it has given me hope that I don’t need a lot of money in order to live a happy life.
The actual dollar amount needed the meet this “happiness” threshold varies by study: some studies put it at $75,000, whereas others cite $161,000. Of course, it depends on the region and country; of 13 countries surveyed in a study from Skandia International, Europeans required the lowest dollar amount needed for happiness. A summary explains:
“…this shows that wealth and financial happiness is not an absolute number, but is relative to your peers and surroundings. Living in Dubai, with all those oil barons and oligarchs, the needs are higher. In Germany, where wealth is more evenly distributed, the needs are not as high.”
In other words, our attitudes about money are influenced by how we compare ourselves to people around us. For most people, this includes comparing our lives to those of our parents. My parents bought the apartment I grew up in — with gorgeous views of the Hudson River — for only $40,000 in 1971 (only $230,000 in today’s dollars). My mom talks about how she and my dad had to pinch pennies for a few months to cover the down payment, but they could afford it on their starting salaries in their mid-twenties ($12,000, about $69,000 now).
Today, you would need to be a millionaire to buy an apartment in the same neighborhood. On decent– but by no means extravagant– salaries, my parents were also able to provide my sister and me with a comfortable middle/upper-middle class childhood of private school and summer camp. This is a lifestyle I’ve always assumed that I would be able to provide for my kids someday.
This innate assumption has given me a certain amount of apathy towards money. I’m only now realizing that I’ve long had an invisible script that I would be able to do the same things as my parents without explicitly focusing on money. Most of my 20’s were spent making little more than would cover my expenses or in grad school. I didn’t think about how much money would be “enough.” Yet I cannot expect to make as much (in terms of purchasing power) as my parents. With the rate that real estate prices and college tuition have outpaced inflation, I suspect this is true for most of my generation. All of a sudden, I find myself worried that I will never be able to afford to buy a home like the one I was raised in, let alone send kids to a private elementary school or college.
According to the research, this shouldn’t be a problem, as long as I make around $75,000 a year, right? Not anymore. A recent study by Betsy Stevenson and Justin Wolfers (2013) attacked the Easterlin Paradox and the whole idea that income is not associated with happiness. After analyzing a larger and more complete data set than was available to Easterlin in 1974, Stevenson and Wolfers found no plateau in levels of happiness as income rises. Instead, they argue that the relationship between income and happiness is very simple and direct: rich people are happier than poor people, and rich countries are happier than poor countries.
Should we just try to make as much money as we can? Researchers Daniel Kahneman and Angus Deaton (2010) take a more nuanced approach to this question by using different measures of happiness than Stevenson and Wolfers. They distinguish emotional well-being (“the emotional quality of an individual’s everyday experience”) from life evaluation (“the thoughts that people have about their life when they think about it”), and, interestingly, find different correlations with happiness for each. Whereas life evaluation rises with income, emotional well being only rises until about $75,000 of annual income. They conclude:
“High income buys life satisfaction, but not happiness, and that low income is associated both with low life evaluation and low emotional well-being.”
This study reinforces what feels like an intuitive dividing line: fall below it, where you earn too little to cover your basic needs, and money becomes a source of stress, impacting both your emotional well-being and life satisfaction. If you fall above this line, earning enough to not just put food on the table, but to eat out, save, or buy a home, then your emotional well-being depends more heavily on other factors (like health and community) than income.
Above this $75,000 point, it is easier to prioritize the things that will make us happy, rather than wealthy, when we think about the impact on our day-to-day emotions. But in order be satisfied with our life choices (when we evaluate them, not just be happy in the day-to-day), do we need to continue to prioritize income? Or are there ways to increase our life evaluation other than making more money? Perhaps focusing on creating a satisfying life, one where you live intentionally, feel connected to friends and family, and pursue your passions, works better than focusing on income.
Tim Ferriss, in his book “The 4-Hour Workweek,” writes:
“There is much to be said for the power of money as currency (I’m a fan myself), but adding more of it just isn’t the answer as often as we’d like to think… ‘If I only had more money’ is the easiest way to postpone the intense self-examination and decision-making necessary to create a life of enjoyment.”
For me, the first step to creating a satisfying life will be to give up the expectation that I will have the life that my parents did. This is a seismic shift in the way that I see my future, but one that frees me to craft it around my own happiness, satisfaction, and emotional well-being.
Image: ‘Moneygami’ by Yosuke Hasegawa, used with permission. Check out his work here:http://www.ne.jp/asahi/fickle/flickers/ and https://www.facebook.com/
If you want more on money and happiness, here are a few resources and references:
- Baumberg, Ben (2011). “Does money buy happiness?” Inequalities: Research from Both Sides of the Atlantic.
- Frank, Robert. (2012). “The Perfect Income for Happiness? It’s $161,000” CNBC.
- Kahneman, Daniel and Angus Deaton (2010). “High income improves evaluation of life but not emotional well-being” Proceeding of the National Academy of Sciences of the United States of America, 107(38).
- Planet Money podcast with an interview with Justin Wolfers (I highly recommend this!): http://www.npr.org/blogs/money/2011/03/09/134370052/the-tuesday-podcast-money-buys-happiness
- Planet Money on how happiness is measured: http://www.npr.org/blogs/money/2013/02/08/171414674/how-happy-is-america
- Stevenson, Betsey and Justin Wolfers. (2013). “Subjective Well‐Being and Income: Is There Any Evidence of Satiation?” The Brookings Institution.