The New Research on Income and Happiness

We’ve all heard the phrase “money doesn’t buy happiness.” However, new research suggests a strong correlation between income and well-being, with no apparent ceiling. How can we interpret these results and reconcile what we’ve always been told about money and happiness?

A Point of Diminishing Returns on Happiness and Income?

A number of studies suggest a positive correlation between income and well-being. And this makes intuitive sense, right? We don’t need a study to show us that paying the bills feels better than not paying the bills. Moreover, once life’s basic needs are satisfied, prickly pear margaritas on the Grand Canyon are a nice touch.

However, an argument has been made for years that a point of diminishing returns is reached on the positive association between income and well-being. A seminal 2010 study by Kahneman and Deaton showed that high incomes improve our evaluation of our life, but not our emotional well-being.

This 2010 study examined two forms of well-being:

Experienced well-being: Feelings in the moment.

Examples:

Why the F is the plane not MOVING??!!

Or

Hey! I’m kinda buzzed! Wanna dance?!

Evaluative well-being: A reflective or holistic view of life when pausing to reflect.

Examples:

You know, I really like my house and my neighborhood and my wife and my kids and my job and my rad work/life balance. Just wow.

Or

F*ck this sh*t.

Folks making less than $75,000 per year experienced greater evaluative and experienced well-being at higher incomes. But at incomes above $75,000 (about $90,000 in today’s dollars) no further improvement in experienced well-being was noted. In other words, I’d paraphrase this 2010 study by saying that more money improves our lives, but doesn’t make us feel any happier above $75,000 at any given moment.

The Kahneman and Deaton study has been used by many bloggers, authors, life coaches, and mainstream media pundits as evidence that money can buy happiness, but only so much. Beyond $75,000/year, it’s all allegedly fluff, fondue, and garden-variety hedonism.

Remember happiness = 7? This concept shows up everywhere. We can make our lives better, but we’ll always feel like life could be better.

New Study: Experienced well-being rises with income, even above $75,000

A new study published in January of 2021 in the Proceedings of the National Academy of Sciences of the United States of America by Matthew A. Killingsworth titled, Experienced well-being rises with income, even above $75,000, is…well-titled. It’s about what the title says.

The new Killingsworth study again examines the same two types of well-being, which are again defined below:

Experienced well-being: Feelings in the moment.

Evaluative well-being: A reflective or holistic view of life when pausing to reflect.

Participants in the study included 33,391 employed adults in the United States, ages 18-65*. At random times throughout the day, participants were pinged on their smartphone and asked to reflect on their current well-being. This method of data collection is a game changer for assessing experienced, real-time well-being.

*Interestingly, the authors do not claim to have a representative sample of the US working population. For instance, participants in this study were 36% male, and only 37% were married. However, the author insists that trends in evaluative well-being in particular jive with previously published trends from representative datasets.

The Results

The Killingsworth study found that experienced (in-the-moment) and evaluative (reflective) well-being continued to rise with income, well above the $75,000 watermark.

This chart sums it up nicely:

In essence, at least according to the Killingsworth study, there appears to be no limit on how income can improve well-being. Or at least that upper end limit hasn’t been explored with this study. Our well-being both in the moment and from a point of reflection can be improved at higher income levels.

…Higher incomes may still have potential to improve people’s day-to-day well-being, rather than having already reached a plateau for many people in wealthy countries.

Killingsworth, 2021, PNAS

Why Does More Income Improve Well-Being?

It’s fair to assume that the factors contributing to happiness or well-being are multi-faceted, complex, and numerous. However, Killingsworth takes a stab at some theories I find reasonable:

1. Higher incomes can reduce suffering.

This is a very reasonable explanation. Higher incomes reduce stress on making ends meet, putting food on the table, and providing healthcare.

2. Higher incomes can increase enjoyment.

Once basic necessities are met, we can use marginal dollars for discretionary spending. This is the fun stuff in life. Like triple-ply toilet paper.

3. Higher incomes give people control over their lives.

Again, this gets back to not living paycheck-to-paycheck and having financial security (to some degree). As you can imagine, those with little sense of control are far less likely to experience a high degree of well-being.

4. Higher incomes can hypothetically allow people to “buy” more time.

Interestingly, the Killingsworth study did not note the ability for high income earners to “buy” more time. In fact, the opposite was true. “Time poverty”—as it’s called in the study—actually increased with income. High rollers are busy.

…Low earners were happier if they thought money was unimportant and high earners were happier if they thought money was important.

Killingsworth, 2021, PNAS

How Do Our Thoughts on Money Influence Our Feelings?

When asked the question “to what extent is money important to you?,” the study noted a “sizable statistical interaction” between income and experienced well-being.

In essence, low earners were happier when they didn’t think money was important, and high earners were happier when they felt money was important.

Participants were also asked “to what extent do you think money is indicative of success in life?” Again, this study notes that feelings on money as success were a strong moderator on the slope between well-being and income. Interestingly, however, those who most valued money as a measure of success exhibited lower overall experienced well-being on average. Equating money and success is a recipe for discontent (on average).

My Thoughts

The idea that higher income can improve evaluative and experienced well-being makes intuitive sense. Sure, some of the best things are indeed free. And sure, some country club A-list members may often cry outside, white-knuckling heated leather steering wheels in new Teslas.

This study also substantiates the notion that we seek validation to uphold our principles and values. Those values and principles are born out of our experiences. Those who think money is important validate their well-being at higher incomes. Those who feel money isn’t important validate their well-being at lower income levels. But on average, these data support the idea that how we feel in the moment and upon reflection can be improved with increasing income. We can pay bills without worry and use marginal dollars for the things/people/places that make life enjoyable in modern society.

The Importance of Saving and Higher Income

But not so fast. Where I think this concept really shines is the importance of saving. We know anecdotally at least—and perhaps on paper—that lifestyle inflation and the endless gobbling of marginal dollars does not improve happiness. While this study may at least partially debunk the idea that there is a $75,000 ceiling on income vs well-being, there is nuance involved.

For instance, this study suggests that high income earners are time-starved. High income earners are not (on average) buying back their time. Perhaps that too is seen as a badge of honor, not a form of disgruntlement. I highly value time, so “time poverty” is indeed a form of poverty to me.

Also, for those already psyched on frugality or at least fond of a high savings rate, a higher income really helps grease the gears. We can increase income, but frugality has a point of diminishing returns. That said, we shouldn’t chase a higher income at expense of all else.

Summary

If we can use a higher income to reduce suffering, increase enjoyment, and create financial security, feelings of well-being will likely come in stride. Of course, we have to be honest with our intentions. If we are using high incomes as a way of “keeping score,” as Killingsworth puts it, we are losing the game. Likewise, if we justify a low-paying job but are voluntarily introducing forms of pain or suffering through financial insecurity, then we are also perhaps losing the game.

How can we use this knowledge to address systemic issues like wealth inequality?

What are your thoughts? Does this jive with your life experiences? Let me know in the comments below.

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