This article originally appeared on FREE in the US.
You might have heard that $75,000 is the annual income you need to be happy. Since a 2010 study seemed to suggest this, the number has been thrown around as a benchmark for happiness, making it's way into an episode of Orange is the New Black and inspiring one Seattle business owner to raise the minimum wage at his company to $70,000.
But it turns out that if you want to base your financial life around maximizing happiness, the story gets a little more complicated, and the question of how much you need to earn can’t just be answered by a number. Not only was the original study widely misinterpreted, but more recent studies about how money affects happiness have shown that it depends a lot on how you make your money, how much you need to meet basic needs, and how you spend the money you earn.
A brief history of the $75,000 a year study
Let’s look first at how we came to that $75,000 figure. For the much-cited PNAS study by Nobel-winning Princeton economists Daniel Kahneman and Angus Deaton, Gallup researchers polled 450,000 people by phone and asked about two things: the emotions they experienced the day before and their overall evaluation of their life.
For the first metric, researchers asked whether people experienced positive emotions of happiness, enjoyment, frequent smiling or laughter, as well as negative emotions of worry, sadness, stress and anger. “Emotional well-being refers to the emotional quality of an individual’s everyday experience—the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that makes one’s life pleasant or unpleasant,” the researchers wrote. They found that “the effects of income on the emotional dimension of well-being satiate fully at an annual income of ~$75,000.”
You might hope it’s all so simple that if you adjust that figure for inflation, which works out to about $87,000 today, then all you need to do is hit that number to be happy. Sadly, that’s not the whole story.
That’s because the authors also measured life satisfaction using something called “Cantril’s Self-Anchoring Scale,” which asks people to rate their life on a ladder scale, in which 0 is “the worst possible life for you” and 10 is “the best possible life for you.” In this metric, how you rate your life keeps going up with the more money you make and has no dropping off point.
“We conclude that high income buys life satisfaction but not happiness,” the authors wrote, “and that low income is associated both with low life evaluation and low emotional well-being.”
Newer research muddies the waters
Betsey Stevenson and Justin Wolfers (an economics couple known for studying the emotions of money, cheekily called “lovenomics”) came to a similar conclusion in terms of more money increasing life satisfaction in a 2013 paper in Brookings Papers on Economic Activity. The paper showed a rise in life satisfaction over countries worldwide as GDP (roughly the value of a country’s economy) rose, which was mirrored in relationships between the rich and poor within countries.
But where they reach a different conclusion is on whether there is a set amount of money people need to achieve well-being. "While the idea that there is some critical level of income beyond which income no longer impacts well-being is intuitively appealing, it is at odds with the data,” they wrote of their sample of life satisfaction and happiness data across 131 countries. “As we have shown, there is no major well-being dataset that supports this commonly made claim.”
To complicate things further, a 2018 study in Nature Human Behavior found that people need even more money to feel satisfied with their life but less to feel happy on a day-to-day basis. “Satiation occurs at $95,000 for life evaluation and $60,000 to $75,000 for emotional well-being” with “substantial variation across world regions,” concluded the researchers, who used Gallup polling data from 1.7 million people worldwide to reach these numbers.
What these numbers have in common is that they’re enough, enough to eat, have a place to sleep, have some kids. But after people make enough, how much more should they try to get our hands on?
How much money you need to feel good about your financial life depends largely on your personal cost of living based on your data-to-day expenses and savings goals. “I think that’s the critical question that you need to ask: Within what range of income relative to how it is that you want to live, can you fall where you can also save for the future and you can build a nest egg, you can save for emergencies. What is that number?” said Dan Witters, research director of the Gallup-Sharecare Well-Being Index.
“Most everyone will predict a higher amount of money than they actually need to be significantly happier,” says Grant Donnelly, Assistant Professor of Marketing at Ohio State University and co-author of a 2018 study in the Personality and Social Psychology Bulletin, which looked at the effect of wealth on 4,000 millionaires. “Millionaires predict that their income will have to be about double what they already have. People who make less feel similarly.”
How you earn and spend your money can affect your happiness too
Beyond how much money you have, it matters how you got it. “It seems to matter if you actually earn your wealth,” says Donnelly. In the millionaires he’s studied who got their money from inheritance and/or sugar mommas/daddies in marriage, “that doesn’t seem to boost well-being or happiness to the same extent that actually earning your wealth does. Actually earning your wealth matters a lot.”
It’s also important to think about how you spend your money. “If people are using their money to buy material goods, it’s likely going to bring less happiness than buying experiences, buying things that bring you closer to other people, and buying time-saving services,” Donnelly said. That’s what Harvard researchers Elizabeth Dunn and Michael Norton found in their 2014 book Happy Money.
Of course, money is not the only thing. “People think their lives will be radically transformed with the acquisition of more wealth, and I think in reality wealth does promise the acquisition of more material goods and other items that can help them construct their desired identity, but I don’t think it brings people actual fulfillment in that process,” Donnelly added.
When Gallup asked people how they felt about their standard of living compared to others, they cited the importance of liking what they do every day, having a role that fits them well, using their strengths and being treated with respect.
“There’s a lot of psychological aspects to that that move beyond a quantitative dollarized income that can and does really move the needle,” says Witters. “These are all things that significantly influence how much or how little someone feels ok with their standard of living compared to others. It’s always better to think more holistically because all these elements of well-being are highly influential on others.”
In other words, your answers for happiness and money won’t come from a calculator or a spreadsheet, but a good hard look at how you’re living and what your money brings to your life.
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