Will More Money Make You Happy?

by Joel Fink

Will More Money Make you Happy photo

Of course more money will make you happier. Right? The answer may surprise you. Read on to find out why more money isn’t always the answer.

Economist Angus Deaton and psychologist Daniel Kahneman analyzed the responses of 450,000 Americans polled by Gallup and Healthways (Princeton.edu).

They analyzed the data in terms of two different kinds of happiness.

Emotional well-being

The first is called “emotional well-being.” This is the emotion a person feels about their everyday experiences, like the how often they feel joy, stress, sadness, anger, and affection. Basically, all the things that make day-to-day life pleasant or unpleasant.

Life evaluation

The second is called “life evaluation.” This is the type of emotion that people feel when they review how their life is going “in general.”

It turns out that these two different kinds of happiness are impacted differently by your income.

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How the types of happiness are impacted by income

People’s day-to-day emotional well-being rises as their income rises, as you might expect.

However, emotional well-being doesn’t seem to rise much beyond an annual income of $75,000.

Adaptation and happiness

After you reach a certain level of income, the pleasure of a pay increase is short lived, due to a phenomenon known as adaptation. Adaption is the effect of quickly adjusting to your new circumstances so that they feel like your new “normal.”

Because of adaptation, the difference between two people’s “emotional well-being”when their income differs by $100,000 is actually less than the happiness one would feel and the misery the other would feel if they traded places. In other words, since they are each acclimated to their current income levels, they can both feel the same level of emotional well-being, even though one makes $75,000 a year and the other makes $175,000 a year.

Moving the happiness needle

Another reason that a person’s emotional well-being is impacted less after reaching a certain level of income is that it takes a larger dollar amount to move the happiness needle. What matters is the percentage change in income, not the absolute amount.

For instance, a $100 raise doesn’t have the same impact for a person making $150,000 a year as it does for someone earning minimum wage. However, if you were to double each of their incomes, they might both experience the same amount of increase in their emotional well-being.

In contrast to day-to-day happiness (emotional well-being), “life evaluation” continues to rise as income rises. As people reflect on their lives, they feel better about the general direction of their life if their income is rising.

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The good news?

The good news is that Angus Deaton and Daniel Kahneman found that most people were quite happy and satisfied with their lives.

About 85% of respondents experienced a lot of “positive affect” each day (i.e., the average of smiling, enjoyment, and happiness). Only 24% reported “blue affect” (sadness and worry), and 39% reported stress.

Of course, they found factors other than income that also impacted emotional well-being and life evaluation.

A person’s health, care giving, loneliness, and whether they smoked were also predictors of day-to-day emotional well-being.

Income and education were more closely related to overall life evaluation. So, when it’s all said and done, can money buy you happiness? It seems that the answer is yes, at least up to a point. And, that point might be somewhere around $75,000 a year.

A word of caution

Be careful looking for more happiness in your life by increasing your stress in order to increase your income, especially after you have reached a certain level. (See Can You Afford to Quit Your High Stress Job?.)

You might find that, although you feel increased satisfaction about the general direction of your life, you aren’t achieving any significant increase in your day-to-day emotional well-being.

You may be better off investing your time and effort in relationships, education, volunteering, exercise, public service, or other activities that improve your day-to-day emotional well-being. You might find more happiness in those efforts than you’ll get from that next bump in income.

Reviewed March 2021

About the Author

Joel Fink is a retired CPA and financial services executive living in Dallas, Texas. He enjoys writing articles that help real people with simple ideas to manage their money and improve their lives.

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