Does money make you happy?

This post has been superseded by our new post on this topic.

If we’re to believe the Internet, various apologists for materialism have quipped that whoever said money can’t buy happiness didn’t know where to shop. Indeed, the happiness of others can be bought at bargain-basement prices with a donation to an effective charity. If you’re thinking of donating a substantial portion of your income, though, it’s natural to wonder how your well-being will be affected. What can research tell us about this?

We first need to clarify what is meant by ‘well-being’. I’m going to focus on emotional well-being, the balance of positive and negative emotions that a person is experiencing at any given time. (This is to be contrasted with life evaluation, which is how people evaluate their lives when asked to reflect on them.) Though I’m going to focus on a single research paper, much what I say applies to other correlational studies of income and well-being.)

In a 2010 paper, Daniel Kahneman and Angus Deaton analyzed survey data from 450,000 Americans and found that emotional well-being – a composite of positive affect, stress, and feeling blue – was related to income. Much of the media coverage focused on the fact that income and emotional well-being were correlated only up to £50,000 a year. For example, the Telegraph‘s article claimed that emotional well-being ‘only rose steadily with annual income up to [a] level—$75,000, or just below £50,000.’

This is right but misleading. Most people would interpret ‘rise steadily’ to mean that for a given increase in income, emotional well-being would increase by a certain amount. For example, the difference between the happiness of someone in a household that earns £30,000 a year and someone in a household that earns £20,000 a year would be the same as that between someone in a household that earns £50,000 a year and someone in a household that earns £40,000 a year.

But the researchers meant something else: that happiness rose steadily with log income up to £50,000 a year. This means that changes in emotional well-being were correlated with changes in relative, not absolute, income. So the gap in well-being between someone whose family earns £40,000 a year and someone whose family earns £20,000 a year is similar to the gap between someone whose household earns £20,000 a year and someone whose household earns £10,000 a year. Looking at the graph below, you can see that moving from $80,000 to $40,000 (£51,000 to £25,000) results in only a small decline in ‘positive affect’ and ‘not feeling blue’ and no change in stress. (I might write about life evaluation – the ‘ladder’ line in the graph below – in another article.)
So there is a positive correlation between income and well-being, though it weakens as income increases and disappears entirely after £50,000 a year is reached. This fact alone doesn’t relate directly to how giving would affect your well-being because giving money to charity doesn’t decrease your income. In fact, thanks to government policies that encourage donations (gift aid in the UK and itemized tax deductions in the US), charitable giving in effect increases your income. But even if you believe that the money you give to charity is, with regard to your well-being, money thrown out the window, it doesn’t follow that income actually causes well-being. Many factors that presumably affect well-being – health, job security, social status – are correlated with income.

Consider Zoila the surgeon and Hortencia the cleaner. Zoila makes eight times as much money as Hortencia, but Zoila donates much of her income to charity, so she has the same amount of money to spend on herself and her family that Hortencia does. Hortencia smokes. Despite having similar disposable incomes, Hortencia’s financial situation is much less secure: she has credit-card debt and lives paycheck-to-paycheck, while Zoila has six months’ living expenses set aside. Zoila has valuable knowledge that will help her keep her job, while Hortencia’s employment is more replaceable. Zoila’s work is interesting and her occupation offers her status, while Hortencia’s work is repetitive and is not appreciated by society. It seems that Zoila would be happier than Hortencia despite their having the same amount of money to spend on themselves and their families.

Finally, £50,000 a year – the level beyond which emotional well-being doesn’t improve – is a low figure relative to the salaries offered by many careers. What is more, the figure refers to household, not individual, income. Most married couples in the US have two earners, so the per-earner threshold is even lower than £50,000. Let’s say that you believe that the relation between income and emotional well-being up to £50,000 is causal and strong enough to dissuade giving more. If you pursue a high-earning career, you could still give tens of thousands of pounds a year while keeping at least £50,000 a year to spend on yourself and your family.

Right now, research can’t settle the question of how giving affects happiness – but you can! If you are ambivalent about giving more, I suggest that you simply try it for a few months. If you find that giving an additional, say, five percent of your income is unbearable, you can always revert to your previous level. But you will probably find yourself no worse off, and those whom you help will find themselves much better off.