“Money is the root of all evil.” “Money can’t buy happiness.” “Mo’ Money, Mo’ Problems.”
Whether it be from the Bible, a parent, or the Notorious B.I.G, we have all heard the same old narrative: money isn’t the answer to our problems. Despite these warnings, we often spend our days laboring away in hopes of bagging that promotion or securing a raise. We fantasize about being rich, hunt for high-paying jobs, and constantly try to move up the financial ladder, often assuming these things will truly make us happy.
On some level, we know that money is the solution to some of our unhappiness. For example, it is clear that to somebody in poverty, more money would indeed alleviate many of their worries. Poverty is stressful, unstable, and unhealthy, and in this sense, an infusion of cash would loosen these restraints on well-being.
This contradiction seems to leave us with a paradox: if money is the solution to many material issues, but not the key to our self-actualization, what role does making money play in our growth and development as people? Is it really true that money doesn’t buy happiness, and if so, to what degree?
The $75,000 myth
If you have ever looked into this idea of money and happiness before, it is likely a certain figure has firmly lodged itself in your memory: $75,000 per year. According to the received wisdom, there is a correlation between income and happiness up until an individual is making around $75,000 (USD) a year, after which point the relationship plateaus. This figure is often treated like the holy grail in this debate, echoed by popular media coverage as a definitive cutoff point after which money no longer buys happiness.
In a way, this figure makes intuitive sense. An income of $75,000 is well above average, and for most people, this level of wealth (or its equivalent in other currencies) seems like it should be enough to guarantee a sufficient level of comfort and protection from the threat of poverty. Additionally, this figure also props up the pervasive narrative that the wealthy aren’t necessarily happier because of their riches. While it is a clean, concise, and satisfying number, unfortunately, it isn’t accurate.
The myth of the $75,000 figure began about 10 years ago, emerging from a landmark Princeton study by Nobel Prize–winning economists Daniel Kahneman and Angus Deaton.1 Widely misquoted, the study actually assessed how income led to a more positive long-term outlook on life, rather than increases in day-to-day happiness. At the time this study was conducted, $75,000 was found to be enough money to keep day-to-day financial concerns at bay; in essence, individuals in this income bracket had reached “middle-class status.” However, for most people, this level of wealth still wasn’t quite enough to achieve some long-term goals, like buying a house.
In short, instead of painting $75,000 as the ticket to feeling fantastic every day, the authors argued that the financial security conferred by this amount of wealth improves how we feel about life overall. However, even at this level of income, there was room for improvement in people’s well-being: the more money they had, the more optimistic they were about their long-term prospects. While slightly more complicated, this is the upshot of the original Kahneman and Deaton paper, rather than the oversimplified “happiness tops out at $75,000” which we’ve all read in the media.
What went wrong?
The reason that day-to-day happiness doesn’t really change as we get richer is due to a psychological concept called the hedonic treadmill. This concept holds that regardless of what’s happened to you—whether you’ve recently been hit by a car or you won the lottery—your happiness will revert back to its previous baseline within about six months, once you have grown accustomed to your “new normal.” In essence, we have a baseline state of happiness, regardless of circumstance.
But there are more issues with the $75,000-per-year story than this psychological baseline. There is always a danger in taking scientific results from a decade ago and treating them as fact. In this case, the $75,000 figure proposed by Kahneman has been subject to inflation: in today’s money, this benchmark would be closer to $93,000.2 With costs of living and education skyrocketing, while wages continue to stagnate, this number is drifting further and further out of reach for most of the population.3 If you read articles claiming that $75,000 is the ticket to joy, keep in mind that the ticket price has gone up.
A salary of $75,000 or $93,000 also means different things to different people. For a graduated college student in the Midwest with minimal loans and responsibilities, $75,000 would be quite comfortable. However, for a single mother in San Francisco, $93,000 per year could be impoverishing. Sadly, this study doesn’t control for this variation, assuming instead that income is “one size fits all.” Clearly, placing a dollar sign on happiness is nothing but a broad overgeneralization.
Mo’ money, less problems?
So, how much money is needed to maximize happiness? Unfortunately, the answer is more. This year, Wharton researchers attempted to reassess the claims made by Kahneman and Deaton about wealth and happiness, taking into account the flaws in their original study and how our economic environment has changed. Their analysis shows that, all other things being equal, earning more money makes us happier.4
Counter to every cliché or clickbait title, their analysis claimed that we are driven and satisfied by income growth, rather than any given benchmark of wealth. As long as we are making more money over a period of time, we are motivated. From a behavioral lens, this makes sense: consistent feelings of progress and repeated rewards fuel our growth-obsessed brains.5
While making more money seems to make us happier, it isn’t the same for everybody. As you move up the income ladder, happiness begins to become more pricey. For example, imagine that your income increased by $25,000. For somebody earning $25,000 annually, this is life-changing. For a person pulling in millions, this is barely a drop in the bucket. In order for a wealthier person to feel a comparable increase in well-being, they need to see significantly higher boosts to their income.5
In their analysis, they also found that instead of being a helpful aspiration, the public perception of $75,000 as the key to happiness may actually be detrimental. After the goal of $75,000 was achieved, people experienced a significant dip in happiness, which was remedied once more money was earned. Is it possible that the media’s over-glamorization of $75,000 has given people overly lofty expectations for how much their lives will improve? Perhaps, it is our perception of our wealth, and our expectations about how it will boost our happiness, that plays a role in our unhappiness.
A holistic approach
If earning more money is beneficial, does this mean we should spend our time in the relentless pursuit of wealth? Probably not. After all, it remains true that many high-income individuals are not happy with their lives.6 Furthermore, even if we do achieve our financial goals, how long will it take for the hedonic treadmill to pull you back to equilibrium? Clearly, happiness is a fickle thing.
It may instead be beneficial to look at predictors of ill-being than well-being. If your work pays you well, but isolates you from vital social connections, it will likely be detrimental to your happiness.7 If you drive a Mercedes to work, but that work is highly stressful, it is unlikely that you are going to enjoy your drive there in the morning (or the workday that follows). If you are paid well to be a cog in a ruthless, immobile hierarchy, your lack of power could lead to distress.8 If your marriage suffers due to your chaotic business hours, an extra infusion of cash probably won’t fix your issues.
On the flip side, the fact that money increases happiness doesn’t mean that the only useful intervention for low-income people is to obtain more money (though that would obviously be ideal). In original research by TDL, we found that people’s beliefs about their finances can lead people to make worse financial decisions. This creates a vicious cycle, where mounting stress invites more cognitive bias and further impairs financial decision-making. We also found that nudging people to adopt a big-picture view, focusing on their values and long-term goals, could improve financial decision-making and help reduce this stress over time.
Overall, there are no easy answers to this age-old question. Is more money helpful? Of course it is. Can the relentless pursuit of it make you miserable? Again, of course. At the end of the day, we are all joggers on the hedonic treadmill, attempting to make the best out of our baseline level of happiness.
While it may seem obvious, the true solution to our problems is balance. If we cannot fully control how happy we are in the day-to-day, we can at least minimize financial stressors. Build a lifestyle that allows you to grow your income, but also grow your relationships. Find a job that excites you, but also keeps stress levels relatively low. And importantly, don’t expect $75,000 to change your life.