Income & Happiness: Your Mindset Matters

In the preceding article on income and happiness, I reviewed multiple studies examining the relationship between happiness and income. Increased income was associated with increased happiness, but it was not a perfect relationship. The largest study showed that there was a satiation point after which higher incomes didn’t translate into more happiness. Dissecting that data and looking to other studies revealed that external comparisons and expectations may be important drivers. I gave five practical ways to apply that data to your career. Recently, another study showed no satiation point and a look into that data can give us some further insights. It highlights the interaction that our internal mindset may have with income and happiness.

Different Happiness Measurements

The previous huge study by AT Jebb et al. (Nature Human Behavior 2018) measured happiness using a survey of >1.7MM people around the world. Then, income and happiness were matched. Even though it was conducted over the course of a decade, the observations were single snapshots across a broad population. That has the advantage of statistical power and comparison across a wide range of conditions. The happiness measured was primarily evaluative well-being. That requires someone to take the time to stop and reflect (and do a survey) based on their recalled experiences over the recent past. Further, that recall may be influenced by their current state.

In contrast, the more recent US study by MA Killingsworth (Proc Natl Acad Sci USA 2021) used experienced well-being. That is a brief scoring of how one feels in the moment. Instead of a single observation in a huge population, they opted for multiple real-time observations in a smaller population. They collected 1.7MM snapshots of how ~33K employed individuals felt in the moment using a smartphone app. That was used to make overall happiness scores for well-being and life satisfaction and matched to income. This was conducted in the United States. So, it is likely generalizable to North America. However, it is possible that Canada may have some differences due to our taxation and social systems.

No Happiness-Income Satiation Point In The Moment

Using the real-time multiple measurements, there was no satiation point. People with more income had higher average scores for their current feelings and their current life satisfaction. That held up to about $640K Canadian dollars of household pre-tax income. In contrast, the preceding global cross-sectional study of evaluative well-being showed a happiness satiation point at $120-240K $CAD depending on household size.

It is important to note that in both studies, it is the log(income) used for the horizontal axis. So, while it looks linear, the rate of increase in happiness with increasing income becomes less for each raw dollar increase in income. Diminishing returns. Still, in the reflective evaluative well-being study, there was more than diminishing returns, but also an actual decrease past a satiation point. In the real-time experienced well-being study, happiness kept rising with – just progressively less rapidly.

money life satisfaction mindset
money well-being

Reconciling the Happiness & Income Studies

These were both large studies with around 1.7 million data points and had statistical power for what they were measuring. So, one explanation is that they measured different things using their different methods. The study showing a satiation point required more recall and reflection while the more recent study was in the moment.

Another explanation is that they examined different populations. The global study grouped populations by geopolitical factors, but was still much broader. The more recent study was in the United States only. There could be cultural and social differences. For example, in the American study, 74% of the association between income and happiness was explained by how much control one had over their life (<0.00001). Income may afford more of that in some countries than others where social, political, or religious controls may dominate.

I don’t think we can prove or disprove the study population confounder without repeating the global study using the real-time methodology. However, there is another smaller US study by D Kahneman (Proc Natl Acad Sci USA 2010) that also evaluated experiential happiness with 450000 measurements in 1000 Americans. They found a plateau in happiness with increased income after $90K USD. Very similar to the global study. The author of this study and the larger 2021 study collaborated to re-examine their data. This yielded some interesting findings about the impact of baseline happiness on the relationship between income and happiness.

Baseline happiness is like a lever for the impact of income.

When D Kahneman and MA Killingsworth teamed up to re-examine their data, they found both studies to be valid. What they had not previously recognized was that the impact of income on happiness was not homogeneous across the happiness spectrum. In unhappy people, increasing income increased happiness up to around $120K CAD. Similar to the global study.

However, above ~$120K, increasing income did not make that group of Eeyores happier. In the pathologically happy Tigger-group, more money above $120K translated to accelerated happiness.

wealthy attitude

My interpretation of the Happiness Mindset Lever

happiness baseline

I will give my interpretation of this and other data, along with my observations as a keen observer of people and their money. It is subjective and uses inference from some semi-quantitative science. So, feel free to disagree. However, it also forms the basis for some practical tips to consider that I will give at the end of this post.

I think that this different response to increasing income by baseline happiness speaks to the importance of mindset and our relationship with money.

When you consider the body of literature around the biology of happiness, about half of our happiness level is fixed. Fortunately, 40% is cognitive behavioural (like mindset) and 10% is circumstance (like income level). We can do something about that second half. So, I think it is worth learning more and plotting a course to action.

Scarcity vs Abundance Mindset

I know a lot of Eeyores and I have watched some of them as their incomes have sky-rocketed. That helped them feel less bad than they did when they were truly scraping by. However, even as they became wealthy, they still couldn’t really find much to be happy about. They make a lot of money, but don’t spend it in ways likely to bring more happiness.

I have watched them buy nice stuff, but quickly become dissatisfied because someone else has something better. Total hedonic treadmill lip-skids-in-waiting. This is also a characteristic of a scarcity mindset. They have an abundance of resources, but can only see limitations. This is why I think that the Eeyore Happiness Group experiences a plateau of happiness despite increasing income.

In contrast, those with a Tigger-like abundance mindset see opportunities. Everything is bouncy-bouncy fun-fun-fun-fun-fun. As they get more resources, that just opens up even more opportunities. They leverage their increased income, spend it in ways that continually leads to more, and enjoy it along the way. There is also evidence from other studies that happiness helps you earn more. Hence, the upward hockey stick in their happiness-income response. The ability to be happy may even be life’s most important skill to develop.

Of course, an alternative explanation is that it is the genetic baseline happiness rather than the cognitive differences that explain the difference. Happy people just feel happy no matter what. However, I don’t think that would account for the acceleration of happiness. Some kind of action is being taken or a compounding reaction is occurring. If it were just a steady baseline, I would expect just a regular increase of happiness with income like in the 30th-70th percentile Pooh Happiness Group.

income abundance mindset

Impact of attitude towards money

Delving further into the Killingsworth study, the strength of the relationship between income and happiness also appeared very different depending upon the individual. Interestingly, the importance of money to a person was not strongly related to their income. So, it is not like higher or lower earners (as groups) cared more or less about money (r=0.02, p=0.06).

However, individuals who placed more importance on money had a much stronger relationship between income and happiness. In particular, people who scored high on the question “To what extent do you think money is indicative of success in life?”, had a very strong relationship between income and well-being (p<0.00001). That group also scored lower than average on their happiness. Money is a tool to work for you and a secondary result of your efforts. If money becomes the primary measure or endpoint, then you are the tool working for it.

There are a couple of additional practical implications that I draw from the data when I put it in the context of other studies. One is that you can always be looking for more, no matter what level of income you have. In another study of millionaires, when asked how much they would need to be happy – the answer was about double. That study also found that those who earned their income were happier. So, it may not be simply having money, but earning it that brings feelings of success in life.

Higher-income, more time poverty

Another interesting finding was that as income levels increased, so did time poverty (p<0.00001). Time poverty was measured through the question “Do you have enough time to do what you are currently doing?” Time poverty appeared to negatively impact the rise of happiness with increased income, although it did not reach statistical significance.

time money exchange rate

This does not surprise me. We exchange our time for money. However, it does highlight that it is important to understand what your time-money exchange rate is. That is the first step to making more deliberate decisions about how you spend your time and money. At high-income levels, it may make sense to buy time by either giving up less of your own time to work or outsourcing some tasks that cost less money than your time’s value. The fact that time poverty increased with income tells me that more high-income professionals need to hear that message.

Three ways to apply this happiness research to your life.

More income may be better, but it depends on why and how you earn it.

Don’t give up on earning more income because you assume that it won’t help your happiness. That may not be true. In all studies, the happiness-income relationship was log-linear. So, there were diminishing returns for earning more income. However, there was not a plateau or decline for most people in the most recent studies in the American context.

Further, earning income can provide its own satisfaction if it has purpose and is aligned with your values. Working with purpose can bring happiness and income as secondary outcomes.

If you value money itself highly and consider it a major marker of success, then earning more income is important for your happiness. However, people with that mindset also tend to be less happy than others. Perhaps, you should consider your holistic wealth as a marker of success instead. They are plenty of ways to deploy your capital and build that kind of wealth. Earning income is just one of them.

Don’t earn more money to become time-poor.

There are diminishing returns on earning income due to our progressive taxation system. Your time becomes less valuable, the higher the tax bracket that you are in. So, learn the after-tax value of your time and use that to balance spending time and buying time from others to optimize your happiness.

Strive towards an abundance mindset. Use your resources for compound growth.

As you accrue more resources, stop and reflect. Recognize that you have more and then use that. Spend that income in ways more likely to bring you lasting happiness instead of short-lived bursts on the hedonic treadmill. Giving your time and money often opens up new opportunities. Plus, giving makes you happier along the way. If you want to grow your business in new directions, look for opportunities to go where you are needed.

The worst thing you can do is blindly earn income and spend money without purpose. Fortunately, by starting to reflect and altering course you can take advantage of compounding growth over your lifespan. I have seen the power of this in the lessons learned from my patients at the end of theirs.

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