Their house was a weathered shack with no yard and a dirt driveway. I would watch the girl skip to the car and get in. I often wondered what that family did - where they worked and how they could possibly live in that run-down house. Then, I wondered how they would afford a car if theirs broke down.
It dawned on me that it would cost them everything they had to buy a car, because they had so little to start with, whereas it would be easy for a family making much more money to buy the same car.
Then, I remembered the girl skipping out to go to school -- and how happy she looked.
Have you ever found yourself saying: “if I only made $XX more per year, I would be happy?” We've all done it. The question of how much money is necessary to be happy has been around for ages with each generation striving for the “magic number” that allows for the perfect balance between income and internal fulfillment.
But does a number like this even exist?
The answer is straight-forward -- although it comes with a caveat. According to a Princeton University study, the link between income and emotional well-being levels off at $75k per year, resulting in no further increase in happiness levels as income continues to rise.
Put another way, money does provide happiness -- but only to a certain point.
So how do you decide on your ‘magic number’? Here are a few things to consider when determining the amount of money you need to be happy:
There’s More to Happiness than Just Earning More
There’s no denying the positive relationship between what you earn and how happy you are. The problem is, too many people stop there.
People who know where their next meal is coming from and those who have basic necessities are likely much happier than those living in poverty. However, once you have attained a comfortable standard of living, additional income rarely leads to increased happiness.
Consider this: a family of four earning right at the federal poverty level ($24,300) gets an extra $2,000. Chances are they are going to use it on something essential like rent, food, or utilities. This is because, according to Maslow’s Hierarchy of Needs, physiological (food, water, etc.) and safety (shelter, etc.) needs are the basic requirements necessary for a person to experience happiness.
- Earning More is Relative: Research shows that people aren’t necessarily concerned with their actual level of income, so long as they are earning more than those around them. Unfortunately, no matter how much a person earns, there will always be others who are wealthier and more successful by comparison.
- Material goods have a transient effect on happiness: For many people, acquiring material possessions increases at the same level (or greater) than their salaries. This means that despite more luxurious possessions, people don’t end up any happier.
- There’s a cost to earning more: Many times people who earn more money don’t get the chance to enjoy it themselves, because the increase in income requires an increased workload. Simply put, more stuff equals more responsibility.
Stop Working Backwards
More money usually means you can have what you want, when you want, and essentially do what you want -- all the things commonly associated with living a “happy life”.
We tend to approach our happiness from the wrong direction. Instead of first discovering the elements to being a happy person and working toward an income level that would satisfy those desires, we typically try to earn a specific but arbitrary income number with hopes that our quest for happiness will somehow be met in the process.
So many people work long hours, doing hard labor, all in an effort to reach the ‘magic number’ of happiness. Unfortunately, this is often at the expense of finding their true happiness and fulfillment. Clearly there is a point at which striving to earn more money or acquire more “stuff” is counterproductive.
If you really think about it, you don’t want to be rich; you want to be happy. And although society paints the picture that wealth leads to happiness, that’s far from the truth. Money can certainly provide for your needs, help you achieve your goals, and generally make life more enjoyable. But simply having more wealth, and an abundance of material possessions doesn’t guarantee fulfillment. Maslow's Heirarchy of Needs doesn't address money at all, but it does focus on the things in life that we need to make us happy.
What We Do is More Important Than What We Earn
In the book, Happy Money: The Science of Smarter Spending, authors Elizabeth Dunn & Michael Norton explain in great detail how what we do with our money is of far more importance than how much we earn.
They conclude that, while the idea of making more money can allow for bigger homes and nicer vehicles, it is ultimately ineffective at turning money into happiness. Their research further demonstrates that if you’re going to spend money on yourself, it’s more beneficial to switch from buying material objects to spending on experiences.
We tend to adapt to the new things we buy and eventually the satisfaction wears off. For that reason, they rationalize that things like trips, shows, and sporting events rank much higher on the happiness scale than material possessions.
So, back to the question of how much money you need to be happy. The answer is: enough to have your needs comfortably met with a few indulgences along the way. While it may sound too simplistic to be true, it’s really not. By first identifying your basic needs and the things that truly make you happy, you can begin reverse engineering your life to reach the point where your income is a result of your happiness, and not the other way around.
The key to this is contentment.
It makes me think back on the young girl that I used to see on my way to school. No worries, no cares -- and no money. Looking back, she probably had the right idea. It’s not how much you have that makes you happy or unhappy, but the contentment of doing the things you love that leads to a rich, fulfilling life.
Pamela J. Horack, CFP® of Pathfinder Planning LLC provides personal financial planning advice and asset management for a simple fee to young adults and working families in North and South Carolina through group classes, one-on-one planning, and ongoing advice.