Everything you need to know about whether money makes you happy

Last updated: March 2016.

Full reading time: 15 minutes.

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.

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

(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.

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 10.³

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:⁴

• 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?”

Here’s the result:

Again, the scale at the bottom doubles with each increment.

You can see that the “ladder” of life satisfaction is roughly straight all the way up, just as we found before.

However, the other three lines start to flatten around $50,000, and are completely flat by $75,000. This means that extra income had no relationship with how happy, sad and stressed people felt after this point.

Moreover, note that this is $50-75,000 of household income. That’s equivalent to an individual income of more like $26-40,000 if you’re single and not supporting kids.⁵

Not all studies find that money stops having any impact. For example, another enormous data analysis by Daniel Sacks, Justin Wolfers and Betsy Stevenson found that happiness continued to improve in countries with higher incomes – or at least there was no clear levelling off (see figure below).⁶

People in richer countries were more likely to recall feeling ‘enjoyment’ or love yesterday, and less likely to experience ‘depression’, or ‘physical pain’ despite being older (see the figure below).

People in richer countries were also a bit more likely to report being consistently treated with respect, having good tasting food, smiling or laughing a lot, and being free to choose how they spend their time (see the figure below).⁷

But simply scanning the data you can see that these associations, while real, are quite weak considering the enormous range of income across the sample. Raising income 16-fold, from $2,000 to $32,000, moved reported happiness from 3.0/4 to 3.3/4.⁸ A 64-fold increase in income, from $500 to $32,000, increased the probability of recalling feeling enjoyment or eating tasty food yesterday from around 60% to 80%. A 64-fold increase in income only raised the likelihood of feeling ‘love’ yesterday from 63% to 73%. Much of our everyday human experiences are just not affected much by money. In other words:

In other studies we looked at, overall life evaluation always showed the strongest relationship with income. If you ask people how happy they feel today, or felt yesterday the relationship becomes more tenuous.⁹

What can make sense of these results?

We guess the key factor is the one we noted at the beginning – you take the best opportunities to invest in your happiness first, so as you get more money, it becomes harder and harder to buy more happiness. Eventually the effect of additional income of happiness becomes negligible relative to other factors.

There could be other reasons for a weak relationship. For instance, one way to earn more money is to work longer hours in a job few other people want to do. Maybe the unhappiness caused by these extra hours at work offsets whatever you gain from the extra income. It’s a case of mo’ money, mo’ problems.

There’s some evidence for this idea. This meta-analysis of over 100 studies found only a very weak relationship between pay and job satisfaction.¹⁰ Some kinds of jobs are low-paying precisely because they are satisfying. For example, if teaching weren’t fulfilling, salaries would have to be higher to convince enough people to become teachers.

Another factor is that we readily adapt to having more money. If you only have champagne once a year, it’s a special occasion. But to quote more Biggie, if “we sip champagne when we thirst-ay”, it’s no big deal. This is called the “hedonic treadmill“. This is particularly true when we spend money on material goods, like fancy clothes, which we quickly get used to.¹¹ Moreover, we persistently underestimate how much we can adapt, so expect money to matter more than it does.¹²

However, there are some things we can’t adapt to, which explains why there remains some relationship between income and happiness even among the rich. One example is that long commutes make people unhappy – and they never get used to them (see the figure below).¹³ More money can also help you have more interesting, varied experiences and relationships, which are important too.¹¹

How come life satisfaction seems to increase more steeply with income than day-to-day happiness? Here’s a likely explanation. If someone asks you whether you are in physical pain, it’s easy to check and give a meaningful answer. But if someone asks you on the phone how satisfied you are with your life, all things considered, on a scale of one to ten… it can be hard to say. As you don’t really know how satisfied you are on average, and you have to answer quickly, people are inclined to substitute in its place a related question that is easier to answer. A natural option is ‘how much money am I making relative to others?’, or ‘how well is my career going?’. This widely observed phenomenon is called attribute substitution by psychologists.

In this respect experience sampling is superior because it avoids a range of possible biases in people’s perception and recollection of their life.¹⁴ Nonetheless, life satisfaction passes several tests for being a good psychological measure (for example, it is stable over time and predicts future behaviour) so shouldn’t be disregarded.¹⁵

So would making more money make you happier?

So far we’ve just looked at the correlation between income and happiness, but correlation doesn’t imply causation. As Stevenson and Wolfers remark:

We should note that we have focused on establishing the magnitude of the relationship between subjective well-being and income, rather than disentangling causality from correlation. The causal impact of income on individual or national subjective well-being, and the mechanisms by which income raises subjective well-being, remain open and important questions.

It could be that there’s some other factor that causes both happiness and income. If this is true, boosting your income won’t boost your happiness. For instance, maybe healthier people are both happier and able to earn more because they have more energy. Or maybe happiness increases your income because happier people make better colleagues.

If these other connections exist, and they probably do, making an effort to earn more money won’t increase your happiness as much as you’d hope from the above correlations alone.

So, if the question is “if I earn more money, will I be happier?”, then the relationship is likely weaker than what we’ve seen above.

And the relationship above was already pretty weak: If you already earn over $40,000, then you need to gain an extra $40,000 per year just to gain 0.5 on a 10 point scale of life satisfaction. You can expect little if any noticeable effect on day-to-day happiness, stress or sadness. That’s a lot of income for a limited gain.

What about the possibility that people who earn more are happier because of their money, but this is counteracted by them having to work longer hours in less pleasant jobs? If that’s what’s going on, winning the lottery would make you happier, but choosing a higher paying job wouldn’t.

So, what about lottery winners? When people write about income and happiness they always mention this study that supposedly shows lottery winners were no happier a year or two after winning. This would be good evidence that there’s almost no relationship between income and happiness, even if you could get the money without having to do any extra work.

However, we went and read the original study, and found that actually the lottery winners were happier – they reported their happiness as 4 (out of 6) compared to 3.82 for the control group.¹⁶

But the real problem is that the study had a tiny sample: there were only 22 winners. This was so small – and the control group so inappropriately selected – that the authors themselves didn’t believe they had yet discovered much. Unfortunately, the story was too good for people to bother fact checking.

(This is also the paper you might have heard cited saying paraplegics are no less happy than anyone else – this is nonsense for the same reason. In fact paraplegics rated their general happiness as 2.96, much lower than others.)

Newer studies with larger samples have generally found that lottery winners seem a little better off – at least after their family and friends stop asking them for money. Unfortunately, it’s hard to say much because i) the samples are usually small, ii) the winnings are often also small, and iii) the outcome measures all differ from one another, and from the papers above.^{17 18 19 20 21 22}

So in the end, what evidence we can get about lottery winners supports what we already thought: more income makes you happier, but only a little.

How do these figures apply to me?

The figures above are based on surveying a cross-section of people in a country. To customize the $40,000 threshold for yourself, you might want to make the following adjustments:

• The $40,000 figure was from 2009. Due to inflation, it’s more like $45,000 in 2016.
• Add $20,000 per dependent who does not work that you fully support.
• Add 50% if you live in an expensive city (e.g. NY, SF), or subtract 30% if you live somewhere cheap (e.g. rural Tennessee). You can find cost of living calculations online, like this one.
• Add more if you’re especially motivated by money (or subtract some if you have frugal tastes).
• Add 5-10% in order to be able to save enough for retirement (or however much you personally need to save in order to be able to maintain the standard of living described above). It’s true the people in the surveys above were saving for retirement, but we suspect not enough.

The average college graduate in the United States earns $77,000 per year over his or her life, while the average Ivy League graduate earns over $110,000.²³ The upshot is that if you’re a college graduate in the U.S. (or a similar country), then you’ll likely end up well into the range where more income has almost no effect on your happiness.

Are there exceptions to this general rule?

The story might be different if you care about money more than most people. If that’s true there could be opportunities to gain money that wouldn’t be worth it for most people, but are for you.

There’s empirical support for this. A small percentage of people say making money is a top priority for them at the start of their careers, and these people do turn out to be significantly more satisfied if they go on to make a lot of it.²⁴ Maybe this is because they enjoy spending money more than others, or maybe it’s just that checking their income is how they track their success. Unfortunately, people whose main goals require earning money are also less satisfied with their lives on average.

If you want to support more financial dependents, you will need to earn more before the income-happiness relationship weakens in the way described above. Likewise, if you live somewhere with an unusually high cost of living, you can scale up the figures at which money stops helping. Finally, if your friends are becoming wealthy and you want to continue to socialise with them in expensive places, money may also be more valuable for you, though we don’t know of any specific studies on this.

Conversely, if none of those apply, extra income may do even less for your happiness than these aggregate surveys suggest.

How much does income matter relative to other factors?

If you’re educated and in a rich country then there are other factors that will affect your happiness and satisfaction much more than extra income.

• Ball & Chernova calculate that for the median single individual, the happiness boost produced by marriage is matched only by a 767% increase in absolute income, or by an increase in relative income from the 50th to the 88th percentile.²⁵
• They also found the boost associated with moving from a health rating of 3 to 4 (when health is scored from 1 to 5) is matched only by a 6,531% increase in absolute income, or by a move from the 50th to the 100th percentile in relative income.
• Being widowed (as a woman) or losing your job (as a man) appears to reduce life satisfaction by about 0.5 points, on a scale of 1-7. Using our estimates above, this would be the same as having your income fall or rise by two thirds.²⁶
• Having a close friend become happy also seems to increase your chance of being happy a great deal (at least 10%).²⁷

What does this mean for your career choice?

We think the message is clear: if you want a satisfying career, once you’re earning above about $40,000, don’t focus on earning more money. Instead, focus on the factors we recommend in our article on how to find fulfilling work.

This is widely accepted by experts in the field. For instance: Timothy Judge, professor of management at the University of Notre Dame, suggests that if you ultimately care about having a job that’s satisfying:

You would be better off weighing other job attributes higher than pay.

(Though note the possible exceptional conditions above.)

What does this mean for having a positive impact on the world?

Money can go much further in the poorest countries. It’s clear that higher incomes benefit people in serious poverty. If the relationship between income and satisfaction is logarithmic, or even more sharply declining, you need 50-100 times as much money to increase the satisfaction and happiness of an educated American as that of someone in the poorest billion people.²⁸

This is one of the main reasons we think that if you want to help people alive today, it’s important to focus on the effects your actions have on those in the developing world. That’s true whether we’re talking about giving to charity, enacting policy reform, or setting up a social enterprise. Their welfare is simply much more responsive to changes in income.²⁹

You may have greater knowledge of your local community, but that’s probably not enough to make up for the fact that your resources could go one hundred times as far if you focus on the very poorest people. And fortunately there is high quality research you can rely on to know what really works in the developing world. One of the top opportunities is just directly giving money to the very poor.

If you gave money to charity, would it make you more satisfied or less?

The results above suggest that if you’re a professional in a rich country, having a lower income won’t make you much less happy. As a result the personal costs of donating to charity are also likely small.

Moreover, donating money is not at all the same as not earning it in the first place. Someone with an income that’s low relative to what they aspire to may feel unsuccessful, and therefore unsatisfied with their life. But if you earn a good salary and donate a big chunk, you probably won’t feel that way. On the contrary – you’ll see yourself as successfully striving to make your mark on the world.

There’s considerable evidence that acts of altruism make us happier, more satisfied and even healthier. This includes acts of charity, as well as other ways of helping people such as buying gifts for friends and family.

This means that donating money could easily make you happier than spending it on yourself.

For instance:

Imagine the following scenario. You are a participant in a psychological experiment: you are given an envelope containing a small sum of money, which you are asked to spend within 24 hours. The experimenter can assign you to one of conditions: she can require that you spend the money on yourself (paying a bill or buying yourself a treat) or she can require that you spend the money on others (buying a present for someone or donating the money to charity).

…the experimenters found that subjects in the prosocial spending condition reported greater happiness after spending their windfall than did those in the personal spending condition. This was not an isolated result. Dunn et al. also conducted a longitudinal study of 16 employees at a Boston based company who received a profit-sharing bonus, finding that those who devoted more of their bonus to prosocial spending experienced greater happiness as a result of spending their windfall; a cross-sectional study of a representative sample of Americans also found greater prosocial spending correlated with significantly greater happiness, while personal spending turned out to be unrelated to happiness.

Aknin et al. examined survey-data from 136 countries gathered by the Gallup Organization, to see whether ratings of subjective wellbeing were positively correlated with donating to charity. Controlling for household income, it was found, in 122 of the 136 countries, that there is a positive correlation between subjective wellbeing and answering Yes to the question ‘Have you donated money to charity in the last month?’ On average, it was found, “donating to charity has a similar relationship to subjective wellbeing as a doubling of household income.”

We worry that last effect is confounded by religion: membership of a church both predicts charitable giving and higher welfare. But there’s good reason to think that giving away money will lower your subjective well-being significantly less than not having it in the first place.

Of course, this can’t justify any level of donations. As is the case for everything else we spend our money on, the selfish benefits we get from donations will experience declining marginal returns: giving $2,000 won’t be twice as fulfilling as giving $1,000. And, in accordance with the logarithmic returns to spending described above, the more money you donate, the more valuable is each incremental dollar of other personal consumption you’re give up.

Still, I’d expect a moderate level of giving to lead to a similarly happy life as no giving, especially if you make your donations frequent and highly salient, so that you can savour the satisfaction that comes along with believing you’re helping others.

The bottom line

You have probably heard both from people who say earning a good income is both incredibly important, and not important at all. As is often the case when you look carefully at the evidence, the truth seems to be somewhere in between.

Unfortunately, existing research is not good enough to say for sure what impact a randomly assigned increase in income has on someone’s welfare. Hopefully more thorough research on lottery winners will answer this question in the future. But until then we at least have a lot of data on how people who earn both a lot and a little report feeling about their lives.

If you’re poor, having even small amounts of extra money is associated with significant gains in welfare. People in very poor countries report low levels of satisfaction with their lives, though their day-to-day happiness is surprisingly resilient.

But most of our readers are university graduates in rich countries, the group that is least likely to benefit from higher income. For them, making a meaningful contribution to their society and having good relationships with friends and family are likely to do them more good than a higher paying job. Inasmuch as earning more means sacrificing these things it’s a very questionable trade.

If you’d like to learn more about how to have a career that makes you both happy and fulfilled sign up to our newsletter and we’ll update you on our latest research each month.

You can also continue reading our guide to finding a career that makes you truly happy.

Appendix I – But I’ve always been told we just look at relative rather than absolute income?

This remains the source of some controversy, but we think the answer is that we care about both absolute and relative income.

You may have heard of the ‘Easterlin Paradox’: why don’t people get much happier when their country becomes richer? The popular explanation in the 70s and 80s was this: people are briefly happy when their income rises, and happier when they are richer than others around them, but don’t value it in the long term when their country as a whole becomes richer.³⁰

The findings in the post above cast serious doubt on whether there is any paradox to explain. People in richer countries are somewhat more satisfied.

But Easterlin, who is now 90 and has spent much of his life studying this apparent paradox, was not convinced by this data. He published two papers in response, attempting to show that how quickly a country gets richer doesn’t correlate with how quickly it gets satisfied.³¹³² Easterlin believed the error being made by others was:

In the present analysis we demonstrate that these conflicting results arise chiefly from confusing a short-term positive happiness – income association, due to fluctuations in macroeconomic conditions, with the long-term relationship. We suggest, speculatively, that this disparity between the short and long-term association is due to the social psychological phenomenon of “loss aversion”.

In response, Wolfers and Stevenson updated their paper to look at how economic growth relates to satisfaction growth over the longest timescales they could analyse.³³³ Examining the figures in their paper, the two do seem to move together, though there’s a lot of other variation. This is to be expected. When you try to relate growth rates in two things, there is a lot of room for measurement error: in baseline income, final income, baseline satisfaction, and final satisfaction. You measure all of these imperfectly, creating a lot of noise that obscures any shared movement they have. Furthermore, no one claims economic growth is the only, or even most important thing, determining shifts in happiness.

Wolfers and Stevenson explain the disagreement this way:

…you should never confuse absence of evidence with evidence of absence. Easterlin’s mistake is to conclude that when a correlation is statistically insignificant, it must be zero. But if you put together a dataset with only a few countries in it – or in Easterlin’s analysis, take a dataset with lots of countries, but throw away a bunch of it, and discard inconvenient observations – then you’ll typically find statistically insignificant results. This is even more problematic when you employ statistical techniques that don’t extract all of the information from your data. Think about it this way: if you flip a coin three times, and it comes up heads all three times, you still don’t have much reason to think that the coin is biased. But it would be silly to say, “there’s no compelling evidence that the coin is biased, so it must be fair.” Yet that’s Easterlin’s logic.

Nobel Prize winner Angus Deaton, by contrast, finds some evidence that relative income matters for ‘happiness’, but doesn’t for satisfaction.³⁴ He comments:

The most famous [unresolved puzzle] is the Easterlin paradox that in spite of the positive effect of income on life evaluation and on happiness, there appears to have been little effect of economic growth. That there is a paradox at all has been robustly challenged by Daniel Sacks, Betsey Stevenson, and Justin Wolfers (2012), and Easterlin’s counter-evidence rests heavily on long-run Chinese data of dubious comparability. This literature typically does not make the distinction between evaluative and hedonic measures that is so important here.

As an aside, one paper attempts to explain the failure of Chinese happiness to rise with reference to much higher air pollution.³⁵

This question isn’t fully resolved, but we’re more convinced by Wolfers and Stevenson’s latest (draft) paper on the topic, which shows a combination of positive and neutral relationships and offers several explanations for why others have not found the same results.³⁶ The arguments come down to methodological details that are tricky to explain, so if you’d like to explore them I recommend reading the discussion section of the paper.

There’s also a common sense argument that we find compelling: if richer countries are more satisfied than poorer ones, which seems to be the case, it would be remarkable if countries didn’t get eventually more satisfied after they got richer, whatever the cause of the relationship between them. I suspect past studies were just not good enough to pick up the effect.

Unfortunately almost all of this appendix concerns income and satisfaction. Given that the income and happiness relationship is weaker to start with, it wouldn’t surprise me if the unpleasant aspects of economic growth, such as pollution, made economic development a pretty ineffective way to increase day-to-day happiness – at least until countries had been wealthy long enough to fix up those problems and invest their higher income in other changes that make them happy.³⁷ Unfortunately, the data on this question is more limited and hasn’t been the focus of so much research.