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PSSST! WANT TO KNOW A SECRET?
The Dirty Little Secret about Money
Research proves money CAN buy happiness…
“You may never be rich,” said my dad, “but once you become a tenured professor, you’ll be comfortable.” I was in my early 20s, just graduated with a bachelor of science in physics and math, about to start my graduate studies in physics, and wondering how this passion-driven career choice will turn out financially.
My parents had never been wealthy.
Mom came from abject poverty. The kind of poverty where she didn’t know where her next meal would come from. The kind where her mother had to go work as the only woman in a crew of day laborers building a seaport, to cover the cost of life-saving medical care for her husband, my grandfather.
Dad’s family wasn’t quite that poor, but not far from it.
Mom was 15 when they met. Dad was 18. They married three years later, a marriage that lasted 71 years until Dad passed away.
Through hard work, sacrifices, calculated risks, and frugality, they clawed their way into the lower middle class by the time I was born. Later, through more hard work, astute decisions, and a bit of luck, they managed to climb solidly into the middle class.
“Money Can’t Buy Happiness” or Can It?
They say money can’t buy happiness, but having heard my parents’ stories about how miserable not having money was, I don’t believe it.
Given how most of us struggle to make more, and how many books, articles, webinars, and courses are sold about money and getting rich, I think it’s fair to say that most people don’t believe it either.
The fact that you’re reading this piece implies you share this disbelief, and a study by researchers from Purdue University, described by Money Magazine, proves that we’re right.
Well, mostly right.
On average, people who make more money are happier, but that happiness stops increasing once you reach a certain income.
Interestingly, the researchers distinguished between two aspects of happiness — emotional well-being, measured by our smiling or laughing most days, vs. life evaluation, asking how content we feel about our life overall. It turns out that both of these plateau, but life evaluation continues increasing for a while even after emotional well-being stops going up.
How Much Do You Personally Need to Make to Reach Peak Happiness?
The cost of living varies from region to region, so it shouldn’t be a surprise that in North America you need much more to reach the highest life evaluation ($105,000 annually for individuals), than say in Latin America ($35,000 a year).
According to a nifty individual income percentile calculator, $105,000 puts you at the 88th percentile of individual income in the US. For those of us who’re married, a household income version, puts the 88th percentile at $164,300.
Want to get even more personal?
Use the tool to look where your own income falls in your state, and how much you’d need to reach your state’s 88th percentile.
For my home state of Maryland, the 88th percentile income is $130,000 for individuals and $215,000 for a family.
What Does this Mean for You?
If You’re not in the Top 12% of Earners
First and foremost, what all this means is that if you’re like most of us (in fact, if you’re like about 87% of us ????), more money probably would buy you more happiness.
If you’re like most of us, research proves that more money probably would buy you more happiness.
If you want to make more money and be happier, Darius Foroux’s piece, “Give Me 5 Minutes and I’ll Give You 5 Ways to Earn More” can help get you started. In the piece, Foroux suggests several ways to make more:
Monetize Your Knowledge
In principle, anything for which you’re already getting paid (e.g., by your employer), or that people come to you for advice on, may help you make more money. How to make that money could be by consulting, tutoring, coaching, developing and selling online courses, etc.
Invest in Rental Property
There are several options for this, each with its own risk/reward profile, and you should educate yourself before going down this path. If you own a home (and assuming your local rental market is good enough), next time you move, see if you can afford to buy your new place without selling the old one, allowing you to rent out the old place. This works if the rent you collect covers your mortgage payments, property taxes, and other expenses, leaving you a positive cashflow.
Other, more capital-intensive options include buying a multi-family property and living in one unit while you rent out the other(s), or letting one of your adult kids live in one unit rent-free in return for managing the property.
If you own a business that rents space, you might be able to find a somewhat larger space to buy, occupy the part you need, and rent out the rest of the space to other small businesses.
Create a Product that You Can Easily and Quickly Get to Market
Getting something to market quickly steers you clear of complicated things that require a lot of knowledge and upfront capital. The simplest and easiest is to create digital products like short e-books that teach people how to solve problems they want solved. Another possibility is to sell hand-crafted items online, or find a website that lets you create and sell on-demand T-shirts, mugs, etc. with cool designs and/or clever slogans.
Unfortunately, this is unlikely to bring in a lot of money per unit, so you need to know how to market them effectively enough to make up in volume the low per-unit profit.
Buy and Sell Stuff You Know
If you’re really into something, you probably know a lot more about it than most of us. Say you’re into vintage pens, you could look for pens at estate/yard/garage sales that are worth more than the seller knows or cares to research. Sell those online to people who know enough and are willing to pay their true value, leaving you with a profit.
This wouldn’t work well with widely known collectibles such as coins — most people know that old coins can be worth a lot of money so they’re unlikely to sell those without researching their value.
The important thing here is to concentrate on things that enough other people want to buy, so you have a ready market to sell to.
If You Are in the Top 12% of Earners
How about if you already make a lot more than the 88th percentile does where you live, and then get a big raise?
At first, having all that extra cash feels great. You start thinking about all the things you can do or buy that you weren’t able to before. Pretty soon you start spending more — a process called “lifestyle inflation.”
Spending a lot of money can be fun, especially at first (think vacations in exotic locations, fancy restaurants, buying “just because” gifts for your significant other and/or kids, etc.).
So that’s how it feels at first to go from say the 90th percentile to the 95th percentile and you spend all the new income. Then what?
Then the higher income becomes your new “normal,” and you start feeling like that Kansas couple who posted online about living paycheck to paycheck on a $500,000 annual income(!). You can read here a good (and somewhat surprising) analysis of their situation from Ben LeFort.
However, if you’re smart and disciplined, you’ll start setting aside and investing much more for your future self, which will give you more confidence for the future.
As noted in a 2017 study “Financial Wellbeing in America” from the Consumer Financial Protection Bureau (CFPB), “Of all the factors that we examined, disparities in financial well-being are greatest between subgroups that have different levels of liquid savings… financial cushions may be particularly closely related to financial well-being.”
“Financial cushions may be particularly closely related to financial well-being” (2017 CFPB Report)
The Bottom Line
As we all intuitively feel, earning more money does make you happier on average, at least if you’re like most of us, earning less than the peak point discovered by researchers.
While higher-income above that point doesn’t provide more happiness on average, what it does do, as Le Fort says, is increase your financial margin of error. It also allows you to survive larger financial shocks in an emergency which, as noted by the CFPB, is a strong measure of financial well-being.
About the author:
My career has had many unpredictable twists and turns. A MSc in theoretical physics, PhD in experimental high-energy physics, postdoc in particle detector R&D, research position in experimental cosmic-ray physics (including a couple of visits to Antarctica), a brief stint at a small engineering services company supporting NASA, followed by starting my own small consulting practice supporting NASA projects and programs. Along the way, I started other micro businesses and helped my wife start and grow her own Marriage and Family Therapy practice. Now, I use all these experiences to also offer financial strategy services to help independent professionals achieve their personal and business finance goals.
Disclaimer: The information in this article is not intended to encourage any lifestyle changes without careful consideration and consultation with a qualified professional. This article is for reference purposes only, is generic in nature, is not intended as individual advice and is not financial or legal advice.