Rule 7 of our 10 Rules for Life is, “To be rich, spend money on what you love.” As we introduce that rule, we note that as long as you have enough money (currently an income of around $100,000 per year), more money won’t make you much happier. This is based on a famous economic study, but a new study has the opposite finding. So, what is true? Does more money lead to greater happiness?
Studies on the Relationship Between Money and Happiness
It is very hard to study the relationship between money and happiness without controlling for other factors, but this famous one by Daniel Kahneman shows that money is a huge factor in happiness only until you reach a level that provides for the basics.
Matthew Killingsworth studied data from http://trackyourhappiness.org, a large-scale project using the experience sampling method in which participants were signaled at randomly timed moments during their waking hours and prompted to answer questions about their experience at that moment. His research found that well-being rises with income at all income levels. A graph from his published results is shown below:
Note that the graph above uses a logarithmic scale, meaning the gap between 15,000 and 30,000 is the same as the gap between 240,000 and 480,000. So, it remains true that earning more dollars at higher incomes matters less than at lower incomes.
Contrary to the Kahneman study, there was no plateau at around $75,000 in income. Happiness continues to grow with more income in this data. I suspect there is a plateau at a much higher income – maybe with incomes over $1,000,000 annually. I also believe another study should examine the happiness of rich people versus wealthy people.
Is it Better to be Rich or Wealthy?
Both studies above focus on how your income affects your perceived well-being. They both study how rich someone is, or wealth. The terms “rich” and “wealthy” are often used interchangeably, but they actually refer to very different populations.
You are rich when your income is significantly more than your fixed expenses. Many professional athletes and celebrities are rich. You can often tell when someone is rich, as they have fancy houses, expensive cars, and clothes, and spend extravagantly.
When someone is wealthy, their net worth (assets minus liabilities) is large enough that earnings from their assets cover their fixed expenses. I also equate wealth with financial independence.
Elon Musk is currently the richest person on earth, but he is very dependent on working in his multiple jobs. I know there are many financially independent people who are much happier and less stressed than Elon. Most people (including me) would never want to have to deal with his schedule and stress.
Focus on Wealth and Financial Independence
So what has changed about my thoughts on money and Rule 7: To be rich, spend money on what you love?
First, I am going to change the wording of the rule above. I am learning that my real goal is wealth and financial independence, so the new wording for my future book will be, “To be wealthy, spend money on what you love.”
Second, I suggest everyone discuss their money goals with their partner and sprinkle in a dose of reality. Here is a great take on work-life balance:
The takeaway is to have enough. Take the time to figure out what you love and value. Use your natural strengths to earn money and then spend your time doing what you love. Don’t waste your time and money otherwise.
Summary
Let us know your thoughts about the relationship between money and happiness. What am I right about and where do I need to change my thinking?
In an upcoming post, we will revisit our advice on spending money on what you love, accumulating wealth, and becoming financially independent.
