What this article covers
Opher Ganel argues that money can buy happiness, and research backs him up: a Purdue University study found that emotional well-being and life satisfaction both rise with income before leveling off, with life evaluation peaking at about $105,000 a year for individuals in North America. He explains what that threshold means for you, with practical ways to earn more if you are below it and why higher earners should save and invest rather than inflate their lifestyle.
Key Takeaways
Money can buy happiness, but only up to a certain income
A Purdue University study described by Money Magazine found that people who earn more are happier on average, but the gains plateau. Emotional well-being (smiling or laughing most days) stops rising first, while life evaluation, how content you feel with your life overall, keeps climbing a while longer.
Life satisfaction peaked at about $105,000 a year for individuals in North America
Because the cost of living varies, the peak was far lower in Latin America, at about $35,000 a year. When Opher wrote the article, $105,000 put an individual at the 88th percentile of US income (the household equivalent was $164,300), and in his home state of Maryland the 88th percentile was $130,000 for individuals and $215,000 for families.
Above the happiness threshold, extra income buys security, not more happiness
Big raises tend to fuel lifestyle inflation until the higher income feels normal, as with a Kansas couple living paycheck to paycheck on $500,000 a year. Opher argues higher earners should save and invest the difference, citing a 2017 CFPB report that found the largest gaps in financial well-being between people with different levels of liquid savings.
PSSST! WANT TO KNOW A SECRET?
The Dirty Little Secret About Money and Happiness
Research Shows Money Can Buy Happiness, Up to a Point
“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.
Can Money Buy Happiness? What the Research Says
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 Income Do You Need 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.
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What Does the Money and Happiness Research Mean for You?
If You’re Not in the Top 12% of Earners: Ways to Earn More
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 and Expertise
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 You Can Get to Market Quickly
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 Resell Items You Know Well
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’re Already in the Top 12% of Earners: Beware Lifestyle Inflation
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: More Money Buys Happiness, Then Financial Security
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.
Frequently Asked Questions
Can money really buy happiness?
Yes, on average and up to a point. Research from Purdue University described in the article found that people who make more money are happier, but that happiness stops increasing once income reaches a certain level.
How much money do you need to make to be happy?
According to the research cited in the article, life evaluation peaked at about $105,000 a year for individuals in North America, compared with about $35,000 in Latin America. The difference largely reflects regional cost of living, so the article suggests checking where your own income falls in your state.
What is the difference between emotional well-being and life evaluation?
Emotional well-being reflects day-to-day mood, measured by whether people smile or laugh most days. Life evaluation reflects how content people feel about their lives overall. Both plateau as income rises, but life evaluation keeps increasing for a while after emotional well-being levels off.
What are some ways to earn more money?
The article highlights ideas from Darius Foroux: monetize your knowledge through consulting, tutoring, coaching or online courses; invest in rental property; create a product you can get to market quickly, such as a short e-book; and buy and resell items in a niche you know well. Opher stresses educating yourself first and focusing on things enough people want to buy.
What should high earners do with a big raise?
Rather than letting lifestyle inflation absorb the raise, the article recommends setting aside and investing much more for your future self. Higher income above the happiness threshold increases your financial margin of error and helps you survive larger financial shocks, and the CFPB links liquid savings closely to financial well-being.
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Disclaimer: This article is intended for informational purposes only, and should not be considered financial advice. You should consult a financial professional before making any major financial decisions.
About the author
Contributing Writer, Wealthtender
My career has taken some unexpected turns, from earning a PhD in experimental high-energy physics, to conducting cosmic-ray research in Antarctica, to supporting NASA projects and programs, to running my own consulting business. I also run several other small businesses and help my wife run her Marriage and Family Therapy practice.
Those experiences taught me to question assumptions, think critically, and recognize that real-world decisions of any significance rarely have simple answers that apply to everyone. Today, I bring that perspective to writing about personal finance. Drawing on my analytical background, business experience, and research, I explore financial decisions, challenge conventional wisdom, and help readers understand the tradeoffs that can affect their financial well-being. To complement my own research and experience, I also weave insights from financial professionals into my articles, drawing on their expertise and real-world experience helping clients navigate financial decisions and challenges.
At medium.com/@opher-ganel, you can read more of my articles and subscribe to receive email notifications when new ones come out.