Happiness And Your Money

You may have heard about a study out of Princeton University’s Center for Health and Well-Being which pegged the income required for maximizing happiness at $75,000 annually. The essence of the study’s findings is that day-to-day happiness, or what the study refers to as “emotional well-being,” continues to increase as income rises to $75K, and then levels off for higher and higher incomes.

The press generally ignored the other conclusion from the study which found that people’s reflective view of how satisfied they are with their life, or what the study refers to as “life evaluation,” continued to climb with increasing income. In other words, when people contemplate how happy or satisfied they are with their overall station in life, the higher the income, the higher the satisfaction.

Keeping it in the family

One of the more interesting points that this and similar studies highlight is that, once your income is beyond meeting basic needs, the influence of money on happiness is relative. It is not the absolute amount of income or wealth you have, but how you stack up against the people around you. One of the more amusing quotes I have heard is H.L. Mencken’s definition: “A wealthy man is one who earns $100 a year more than his wife’s sister’s husband.”

Supporting this view of wealth is another study I found referenced in a New York Times article:

“…economists David Neumark and Andrew Postlewaite examined the behavior of a large sample of pairs of American sisters, each containing a sister who did not work outside the home. The authors’ goal was to learn what factors might influence the other sister to seek paid employment. They rounded up all the things that are supposed to affect the decision to work—the unemployment rate in the local labor market, the wage rate, education. All of these factors had some impact, but relative income was the most powerful: a woman in their sample was 16 to 25 times more likely to seek paid employment if her sister’s husband earned more than her own.”

Up to 25 times more likely to seek employment! That is an unbelievable statistic. It shows the powerful influence of relative wealth.

It is also interesting to note that an income of $75,000 is about 1½ times the median household income in the United States (which was ~$47,000 in 2013 according to the Federal Reserve Survey of Consumer Finances). According to the Fed survey, only about 30% of all households had incomes above the $75,000 level, so this is consistent with the relative value of income on happiness. If you earn more than two-thirds of the country, you probably feel pretty good about your situation and can enjoy the little luxuries in life.

Impact on your financial planning

So how does this relate to investing? The accumulation of wealth is just a means to an end. You are probably investing with specific goals in mind, whether a secure retirement, a second home, or to fund your kid’s college education. You will probably be happy achieving your goal and unhappy failing to meet your goal. But if you exceed your goal, you may not feel significantly happier than if you had merely met the goal.

Therefore, when picking your investment strategy, it may be wise to select a strategy with the highest probability of hitting your goal, not necessarily the one with the highest expected return, which will also, in all probability, come with the greatest risk.

What really matters: income or wealth?

On a final note, I’m always a bit perplexed by the fixation on income instead of wealth (income being what you earn each year and wealth being the total value of your assets). This bias shows up not only in these studies (probably because it is easier to get data on income), but in the ongoing political debate around raising taxes on the “rich.”

To me, being rich reflects your net worth, not your income. I would think overall happiness is more correlated to wealth than income. As a simplistic example, if you had $10 million sitting in a safety deposit box, you would have zero income, yet probably would feel much more financially secure than someone earning $100,000 and spending it all every year.

Sources: “High income improves evaluation of life but not emotional well-being” D. Kahneman & A. Deaton, Princeton University. The New York Times Magazine, “Why living in a rich society makes us feel poor” (2000). Federal Reserve, 2013 Survey of Consumer Finances.