Money and Happiness: What Is the Relationship?

July 6th, 2022 by Matthew Fraker

As economists discuss the possibility of a recession, I became intrigued by the relationship between money and happiness. We need money to survive, a metric commonly referred to as a living wage. Is there an amount over and above living wage which will increase our overall happiness? If so, what is it, and what is the relationship between money and happiness?

The first article I read highlighted research performed by Matthew Killingsworth, a senior fellow at Penn’s Wharton School. That article can be found here. But in summation, Matthew recorded an individual’s evaluative and experienced well-being through an app he created. Experienced well-being is how people feel in the moment or day-to-day compared to evaluative well-being, which measures an individual’s overall satisfaction. As Killingsworth points out, many articles almost exclusively focus on an individual’s evaluative well-being, but neglect experienced well-being.

According to the article, after collecting 1.7 million data points from over 33k individuals, Killingsworth suggested that there is no specific amount to where money will no longer impact the well-being of an individual.

On the flip side, according to a Princeton Study in 2010 by Daniel Kahneman and Angus Deaton, to achieve maximum happiness, individuals need to make an annual income of at least $75,000. Here is an article in Time elaborating on the 75K happiness threshold discovered by Kahneman and Deaton. Time says that while emotional well-being—a term that sounds very similar to experienced will-being— peaks at 75k, earning above 75K still impacts evaluative well-being, or how people feel overall about their lives.  

Regardless of the actual number, the article outlining Killingsworth’s findings reports that “income is only a modest determinant of happiness.” It seems like money is significant because it can impact how much control an individual has over their life.

The idea of control seems abstract and subjective. I consider myself a risk-averse person, so the concept of control appeals to me; however, I think of money as a means of offering security. Financial security can provide means to be proactive or reactive in many different situations (e.g., the HVAC breaks down and the replacement cost is 6K-10K or affording a preventative maintenance contract to keep the system running). I also believe that financial security can lead to certain freedoms and creature comforts, which could indirectly give individuals more control over their lives. That is not to say that an individual can’t have a remarkable life without having tons of money, and prioritizing money could lead to unhappiness. An article by the Harvard Business Review discusses prioritizing money and its relationship to happiness here.

I will leave you with one final concept by Kahneman, recipient, 2002 Nobel Prize in Economics. In the book “This Will Make You Smarter” Kahneman writes:

“Winning the lottery is a happy event, but the elation does not last. On average, individuals with high income are in a better mood than people with lower income, but the difference is about a third as large as most people expect.”

So, while money is essential, it is not the most crucial thing in life. I think the most valuable resource is time and, more importantly, how we use it.

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