Everything you need to know about whether money makes you happy

econ

 

Introduction

It’s a cliché that “you can’t buy happiness”, but at the same time, financial security is among most people’s top career priorities.1 Moreover, when people are asked what would most improve the quality of their lives, the most common answer is more money.2 What’s going on here? Who is right?

A lot of the research on this question is of remarkably low quality. But there have been some recent major studies in economics that allow us to make progress. In particular, we now finally have survey data from hundreds of thousands of people all around the world. We’ve sifted through the best studies available to figure out what’s really going on. The truth seems to lie in the middle: money does make you happy, but only a little. And this has many important implications about trade-offs you face in your life and career.

Summary of main points

  • Recent surveys of hundreds of thousands of people, in over 150 countries, show that richer people report being more satisfied with their lives overall, but that the richer you become, the more money you need to increase your satisfaction further. This is because people spend money on the most important things first. Someone earning $100,000 per year is only a little more satisfied than someone earning $50,000. The best available study found that each doubling of your income correlated with a life satisfaction 0.5 points higher on a scale of 1 to 10.
  • If you look at how ‘happy’ people say they are right now, the relationship is weaker. One large study found people in countries with average incomes of $32,000 were only 10% happier with their lives than those in countries with average incomes of just $2,000; another within the US could find no effect above a $40,000 income for a single person.
  • Moreover, some and maybe even most of this relationship is not causal. For example, healthier people will be both happier and capable of earning more. This means the effect of gaining extra money on your happiness is weaker than the above correlations suggest. Unfortunately, how much of the above relationships are caused by money making people happier is still not known with confidence.
  • Once you get to an individual income of around $40,000, other factors, such as health, relationships and a sense of purpose, seem far more important than income. So our recommendation is not to focus on earning more than this (insofar as you want to become happy, anyway).
  • However, you may gain from earning more than that if: you have dependents, you care about money more than other people, or you live in an area with an unusually high cost of living.
  • Giving money to someone living on $1,000 per year in the developing world will do far more to improve their lives than giving the same amount to someone earning $25,000. The correlations above suggest that it will be about 25 times more valuable. If you want to help people, this is a major reason to focus on international poverty rather than helping the relatively poor in richer countries.
  • Giving some money to charity is unlikely to make you less happy, and may well make you happier.

Are richer people more satisfied with their lives?

Thinking about it for a moment, you’d expect that the richer you are, the more extra money you need to further increase your happiness.

If you’re earning $10,000 a year, and you get an extra $1,000, you’re probably going to use it on something pretty important, like making rent, which will make a big difference to your happiness. But if you’re earning $100,000 per year, you’ll hardly notice an extra $1,000. Maybe you’ll just use it to eat out a bit more. In other words, you’d expect the relationship to be diminishing. If you draw out a graph of income against happiness, it’ll look a bit like the graph below. This is what every economist, philosopher and psychologist who works on this topic expects to see.

graph of happiness and income

At some point you end up spending money on stuff that doesn’t make much difference. For example:

toilet paper made of gold

(That’s literally a roll of toilet paper made of gold that some people bought.)

The interesting question is how fast that happens. It may be that at middle-class incomes extra money still makes you significantly happier. Or perhaps after that point extra income has no discernible impact at all.

One way to figure this out is to ask lots of people all around the world how much they earn and how satisfied they are with their lives. A typical question of this kind from the ‘World Values Survey’ is:

“All things considered, how satisfied are you with your life as a whole these days?: 1 (dissatisfied) – 10 (very satisfied).”

In the 70s and 80s, it was widely thought by psychologists that after a certain point, there was no relationship between income and life satisfaction, at least in wealthier countries.

Today, larger and more rigorous studies haven’t borne out that result. As you get richer, you need a lot more money to make you more satisfied, but there’s no maximum level of income beyond which more seems to contribute nothing.

The best study we could find is this one by famous economists Betsy Stevenson and Justin Wolfers. It draws on polling data from hundreds of thousands of people in 166 countries and found that people in richer countries reported being more satisfied with their lives than those in poorer countries, and that within a country, richer people also reported being more satisfied than those with lower incomes.

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Image source.

As you can see, this survey found a clear straight-line relationship between income and happiness both within and between countries. The lines are straight rather than curved because each increment on the bottom of the axis indicates a doubling of income.

Roughly, what this means is that if you double your income, you gain about half a point on a scale of 1 to 10 of life satisfaction. More precisely, this is a called a logarithmic relationship.

Note that this is just an association at this point – we discuss whether higher income is actually causing people to become more satisfied below.

According to this survey data, a typical person with a household income of $2,000 rates their life satisfaction at around 4.2 out of 10. A typical person with a household income of $64,000 rates their life satisfaction at 7.2 out of 10.9

In the past, with only inconsistent polls available in a small number of countries, this relationship was much less clear, causing researchers to think there was no relationship between satisfaction and income. For more on the controversy about this today you can skip to Appendix I.

OK, but are richer people happier?

There’s more evidence for a maximum useful level of income if instead of asking people how their life is going overall, we ask them how they feel right now or felt yesterday.

For instance, this study by Nobel prize winners Daniel Kahneman and Angus Deaton, relied on a phone poll that asked hundreds of thousands of Americans how they felt in the following ways:11

  • Positive affect – “were you happy yesterday?”
  • Low stress – “did you feel stressed yesterday?”
  • Not blue – “did you feel sad yesterday?”
  • Ladder – “how satisfied are you with your life overall?”

 

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