Monday

How much money is enough?

If you happened to see the recent lists of 2009 compensation packages for CEOs or hedge fund managers, you may have found yourself trying to wrap your head around some staggering numbers.

Larry Ellison made an estimated $84.5 million last year while hedge fund alpha-dog David Tepper took in about $4 billion.

What do those numbers mean? Was Tepper 473 times more "successful" than Ellison in 2009? And how do they compare to you? Let's say you're a Bay Area resident with a median individual income of around $50,000.

Ellison's compensation was about 1690 times yours. Does that sound about right for the respective jobs you did last year?

Leaving aside the arguments about whether or not such ratios are logically or morally out of whack, let's consider the meaning of this money from another perspective: what does a $4 billion or an $84 million, or $50,000 income mean in terms of personal satisfaction?

In other words, if you were making $4 billion a year, would you be happier? If so, how much happier? What if you (you, median Bay Area person, with a $50,000 a year income) were making $100,000 a year? Would that be enough? What about $200,000? $2 million?

Is there a point of diminishing returns -- an income level after which happiness stops increasing along with income?

***
Marty Nemko, a Bay Area career coach and radio host says his clients put "too much" emphasis on money when considering their career choices.

"I just saw a client who makes $500,000 a year, and he's pissed off that his peers are making $700,000. Like it's going to affect his quality of life!

There are legitimate cases in which more money does make a real difference in well being, Nemko says if you can't afford health care, for example but too often, he says, he sees people pursuing careers they would "never in a million years have chosen" simply because those jobs feed a consumptive, "designer-label lifestyle."

Be conscious of what you're trading away in the quest for a higher salary, Nemko cautions. "Normally, the people who make big dollars are the people who are bringing in big dollars for some other entity," he says. "They're corporate lawyers, bond traders, or they sell insurance -- stuff that may or may not make the world much better, and that they don't even like that much."

If you're still convinced that an increased income will improve your well being, Nemko has another important caveat: "What counts is after-tax dollars. If you fight for an extra $20,000 a year but you're really only getting $12,000 after taxes, how much is that really going to change your lifestyle?" he says.

So is there a magic number that Nemko pegs as sufficient for getting by happily in the Bay Area? In a recent blog post he details a plan for living well on $20,000 a year, but Nemko says the income-satisfaction point will vary depending on one's choices of things like housing, cars, and whether or not one spouse stays at home.

"I can't give one number" for how much is enough, he says.

***

Jean Chatzky, the financial editor for NBC's "Today Show," did come up with such a number after conducting a survey of 1,500 Americans in 2003 for her book "The Ten Commandments of Financial Happiness."

Chatzky says the amount of money required to "live comfortably" varies by region, but her survey of Americans' attitudes suggested that "once you've got enough to put food on the table, gas in the car, go out to movies occasionally and go on the occasional vacation, more money doesn't make you happier."

She found the point of diminishing happiness returns was about $60,000 per household, annually. In other words, after $60,000, gains in income didn't bring corresponding increases in happiness.

Like Nemko, Chatzky emphasizes that making more money to meet basic needs can significantly affect well-being. "When you look at what has the ability to make people miserable, the leading factor is health. If your health is not good and you are so poor that you are struggling on a day-to-day basis ... that's an economic problem."

Beyond these basic needs, Chatzky says what makes people happier is "having greater control over whatever money they have." Her survey reflected higher happiness ratings from people who "set goals for themselves and benchmarked those goals; people who paid their bills as they came in instead of saving up their bills to pay all at once; and people who saved something."

***

Nemko's and Chatzky's conclusions may come as a relief: forget keeping up with the Joneses (or the Ellisons and Teppers). The sacrifices aren't worth it.

As Chatzky puts it, "Measuring up doesn't help anybody. If you can get yourself to a place where you are really focused inward instead of outward, you're going to be significantly happier."

That may have been the end of the story, had I not called Justin Wolfers, associate professor of business and public policy at the University of Pennsylvania's Wharton School of Business.

In 2008, Wolfers and his Wharton colleague Betsey Stevenson published a study rebutting the so-called Easterlin paradox (the finding, in a 1974 paper by economist Richard Easterlin, that, while rich people within a country are happier than poor people, increases in a country's GDP do not correlate to an increase in national happiness).

(You can find a link to Wolfers' and Stevenson's paper, along with a good explanation of its context and reactions to it -- here.)

"I'm biased, of course," Wolfers told me, "but my sense is that most economists have gone from believing in that Easterlin hypothesis to believing it looks like income and happiness are quite strongly related."

OK, so maybe more money creates more happiness, but only up to a point, right?

Well, maybe not.

Wolfers says he and Stevenson are halfway through a new research paper investigating precisely that hypothesis, and so far, they've found it to be false.

"If you look for evidence that there's some level above which money is unrelated to happiness," Wolfers says. "You simply can't find it. Using American data, [from sources such as Gallup polls], it's true that people earning $50,000 are happier than those earning $25,000, people earning $100,000 are happier than those earning $50,000, and people earning $200,000 are happier than those earning $100,000."

So can we conclude then, that Larry Ellison is 169 times happier than you?

Well, not exactly. But Wolfers and Stevenson have, in fact, quantified the relationship between income and subjective reports of well-being.

"It's what we call a linear log relationship," Wolfers says. Translation: "At any point in the income scale, a 10 percent rise in income buys the same rise in happiness."

And the Wharton professors have found this formula holds cross-nationally, too. "A 10 percent rise in income for someone in Burundi buys about the same change in happiness as a 10 percent rise for people in the U.S.," says Wolfers. "That's the sense in which we say there's no evidence of satiation. There's no evidence of it running out at income level whatsoever."

(Wolfers' analysis spans multiple studies, but he says one of the recent Gallup polls he analyzed listed ">$500,000" as the highest income category.)

The upshot is that hedge fund honcho David Tepper would, in theory, need to earn an extra $400 million to see a 10 percent increase happiness. You, Bay Area median income earner, just need to find $5,000 more per year to make the same jump in your sense of well-being.

4 comments:

Jersey Mom said...

Very interesting. How much IS enough? I think depends on who you ask. For me, I think the annual income of $200k is enough for our family. Although taxes take up more than 1/3 of it, our expenses take up less than 1/3, and we're able to save the rest for the kids' college and our retirement.

Howard said...

In 2003, maybe $60,000 was the average/median which Chatzky found to be the optimum "happiness" salary. However, on the coasts, we can easily see that amount would be a bit higher. Add on 7 years of inflation and cost of living increases that we've seen, and that number easily goes above $100,000.

me in millions said...

Interesting article! Thanks for sharing.

Money Reasons said...

More money buys you more opportunities than that less money. If made 500,000 a year and was able to vacation in France, and Hawaii a few times a year (and similar foreign places each year after that)... I'm pretty sure I'd be happier than if I went camping a few times a year for vacation.

I don't know if I believe that the relationship is linear (in fact I find this hard to believe...), but I know if I made 500,000, I'd be happier than if I made 50,000.

I think I'd also be happier if I started out at 50,000 and over a few years got bumped up to 500,000. I would feel a sense of pride and accomplishment.