How Much Money Do You Need To Buy Happiness? Let’s Talk About It

You have heard versions of the saying many times:

Money can’t buy happiness.

Money can’t buy me love.

The love of money is the root of many evils.

Alright, alright, we get it. Money isn’t everything. But it isn’t nothing either.

We all want more money, but we also all know in the back of our minds that money alone won’t make us happy.

But the main reason why money doesn’t buy happiness is that people are overwhelmingly bad at understanding what will make them happy.

Think, for example, about a quote from the comedian Daniel Tosh:

“Money doesn’t buy happiness.” Uh, do you live in America? Because it buys a WaveRunner. Have you ever seen a sad person on a WaveRunner? Have you? Seriously, have you? Try to frown on a WaveRunner. You can’t!

Inherent in this joke is the idea that some things will make you happy. This notion drives most marketing and product advertisement. Buy this widget and you will be happy — your life will be fulfilled.

But there is surprisingly little correlation between material possessions (quantity or quality) and happiness.

In my recent article “Investing In The Good Life,” I explored 10 elements of the “good life” — characterized by lasting happiness and life satisfaction — and how to optimally orient one’s investing to achieve it. These elements aren’t merely my personal values, but behaviors and activities that have been demonstrated by significant scientific research to result in lasting happiness.

Human beings appear to be wired to derive lasting happiness from a loving family, strong friendships, a driving sense of purpose, and a healthy mind and body.

More money doesn’t necessarily negate happiness. It just depends how you spend it. If it is being used to facilitate and enable the elements of the good life, more money can lead to more happiness.

Let’s talk about how money can buy happiness, then talk about how to invest to provide the funding.

Money Can Buy Happiness… If You Know What To Buy

A classic example of the rich yet unhappy person comes from literature: Jay Gatsby from F. Scott Fitzgerald’s 1925 novel The Great Gatsby.

Gatsby is fabulously rich, lives in a luxurious mansion, throws lavish parties, and is the envy of Long Island. And yet, he’s also lonely, idle, and unfulfilled.

On the other hand, anyone who has experienced poverty knows the misery it almost always engenders.

In a 2010 study, Daniel Kahneman and Angus Deaton found that the optimal income for happiness was $75,000 ($105,000 in 2024 purchasing power). Significantly less than that resulted in unhappiness due to financial stressors, unhealthier diets and lifestyles, and more relational difficulties including divorce.

However, significantly more than this amount of income resulted in steeply diminishing returns in terms of happiness.

More recent surveys asking people how much money one needs to be happy tend to fall, on average, right around that number of $105,000 (or $75,000 in 2010 dollars). There is fairly wide variation, of course, depending on the cost of living in the area in which one lives.

If you live in Manhattan, San Francisco, Santa Barbara, or Honolulu, local residents believe they need over $140,000 a year in income to be happy.

But in most parts of the country, people believe they need between $80,000 and $120,000 to be happy.

What’s the midpoint of that? Right around $105,000.

Of course, self-reported surveys on this subject are a little suspect, because people tend to confuse “need” and “want.” It is human nature to always want more money.

In a recent survey, Americans across all income levels reported that the amount of income needed to be happy is a little bit more than what they make.

This reminds me of the famous quote attributed to John D. Rockefeller:

How much money does it take to make a man happy? Just one more dollar.

Notice from the above chart, however, that the income group reporting the lowest amount of additional income needed to be happy is right around $105,000.

The further you go below or above $105,000 per year in income, the more income people think they need to be happy.

It is fascinating to see that people making $250,000 per year believe that they would need 40% more income to be happy.

What a striking illustration of lifestyle inflation!

Remember, though, that this relationship between $105,000 in income is a correlation, not a causation.

More recent research from a group of psychologists who have examined all the studies on money and happiness reminds us that emotional well-being is separate from income.

• Those with low emotional well-being become happier with more money only up to about $100,000. Beyond that level of income, there are no additional increases in happiness.
• But those who are already the happiest people with the most emotional well-being actually enjoy accelerating happiness and life satisfaction as income rises above $100,000.

Why is that? I would argue it is because the happiest people are already doing well on the various elements of the Good Life that I discussed in the article linked above. More money simply allows them to invest even more into those positive relationships, behaviors, and priorities.

How Much Do We Need To Invest?

The most obvious way to generate $105,000 a year in income is through a job that pays $105,000 a year. (Brilliant, I know.)

Assuming one enjoys their job, this kills two birds with one stone. It provides meaningful work, which promotes happiness, and it generates a level of income that often correlates with optimal happiness.

For those of us whose skills don’t command wages of $105,000 per year, or for those who’d like to quit their jobs and do something else with their life, how much invested capital would be required to get to $105,000 in passive income?

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Well, that’s depressing.

However, keep in mind that the average Social Security benefit for Americans is currently $21,380 per year.

So, if we include that for the period of life in which it applies, the amount of investment portfolio income required to get to a total of $105,000 drops to $83,620.

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Assuming you begin investing at age 25 and continue through age 60, you’d need to invest just shy of $30,000 per year to get to $1,045,250.

Yikes!

But that assumes you invest in something with a 0% return.

If you assume instead that you start investing at age 25 with starting capital of $5,000 and contribute $18,000 per year ($1,500 per month) without interruption, compounding at a 6% return, you would end up with a little over $2 million in portfolio value at age 60!

If your returns averaged only 4% per year, you’d end up with about $1.35 million in portfolio value, whereas if your returns averaged 8% annually, you’d end up with nearly $3.2 million in portfolio value.

In this scenario, you would have invested a total of $635,000 over 35 years, but because of investment returns, your portfolio value would be in the millions!

Reduce the initial investment to $1,000 and the annual contribution to $12,000 ($1,000 per month) and you still end up with over $1.3 million in portfolio value at age 60 with a 6% average annual return.

Go to the SEC’s compound interest calculator and play around with it for yourself. Nothing gets the blood flowing like the magic of compounding.

For those with a leg up from a large inheritance and/or the fortunate ability to invest tens of thousands of dollars a year, accumulating enough to generate $105,000 in passive income by one’s midlife years may be possible.

But even those of more modest means can eventually become millionaires and achieve financial freedom with steady and sustained accumulation and investment.

Consider this. The yields listed in the tables above are yields-on-cost. In other words, one’s total invested capital (including reinvested dividends) needs to have those YoCs listed above in order to generate a set amount of income.

If you have many years of life ahead of you, then you could theoretically invest in a growing company with a 3-4% yield today and get a YoC of 7-8% in a decade or so.

Over 20 years, you might have a YoC in the double-digits. Over 30 years, your originally invested capital could have a YoC in the high teens or 20s.

I say this to make the point that, after 20 or 30 years of consistent investment and steady contributions to an investment account, it is not inconceivable that one’s average yield on all invested capital would be 8-9%, considering both recently invested money and money that has been invested for decades.

As such, if one invested a total of $1,000,000 over the decades at an average YoC of 8.362%, then one’s annual income would be… wait for it… $83,620.

Add Social Security benefits to that and you get $105,000.

Practical Ways to Invest In Happiness

However, and this is important, financial freedom can be deceptive.

Jettisoning all meaningful work to transition into a life of leisure and relaxation often induces a sense of idleness, listlessness, and purposelessness. That’s obviously not the goal.

The goal, instead, should be to use one’s money, whether it’s $105,000 a year or something less than that, to invest in the various elements of the good life.

• Frustrating and time-consuming work isn’t ideal, but no work whatsoever usually isn’t here. Money often affords the opportunity to pursue more meaningful and satisfying work, whether it’s paid or unpaid.
• Buying things for oneself results in temporary pleasures. Buying things that can be shared with friends and loved ones typically results in lasting satisfaction and gratification.
• Enjoyable experiences can be fun alone, but with friends and family they become priceless. I’ve noticed that reminiscing becomes a larger and larger part of conversations between old friends and family the longer the relationship has lasted. Reminiscing provides a recurring source of happiness from the original shared experience.
• Investing in higher quality, healthier food pays ample dividends by making you feel better and helping to prevent diet-related diseases down the road.
• Above all, money buys time. Investing that time into relationships, exercise, mental health, a deeper and more authentic spiritual and/or religious life all tend to promote lasting happiness and life satisfaction.
• Finally, more money translates into a greater capacity for generosity. Regularly giving money to good causes tends to promote lasting happiness and life satisfaction.

On that last point, just as I have set myself a goal of generating more and more passive income from dividends every year, I also have a goal of giving more and more to charity every year. By hook or by crook, I’ve managed to do that for seven consecutive years, and it becomes increasingly satisfying the longer that record is extended.

How Then Shall We Invest?

Okay, let’s say you agree with all of the above.

How do we invest to generate a passive income stream with which we might pursue the good life?

My investing strategy, as articulated in “The Galley Ship Portfolio: Allocating Capital For Perpetual Dividend Growth,” is to combine high-quality dividend growth stocks (rowers) with a select number of safe, high-yielding securities (sails) to grow my portfolio dividend income stream as quickly and sustainably as possible.

As such, even as someone in my early 30s, I own investments across a variety of current yields.

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After 10 years, capital invested evenly across this portfolio would hypothetically (if my estimated dividend growth rates are accurate) render a YoC of around 9-10%.

Over 20 years? 16-18%.

Maybe this calculation is ambitious, even though I’ve tried not to be wishful or Pollyannish with it. And, of course, it will require monitoring and occasional stock recycling. But this is how I personally aim to construct a portfolio that will, eventually, yield $83,620 per year. Or maybe even $105,000. Who knows.

Whatever it is, it will be in service of the broader goal to pursue the elements of the Good Life.

That, in my view, is the best way to invest — and the best way to live.