Princeton economist, Angus Deaton, who was awarded the Nobel Prize in Economics last year, is best known for his work on the relationship between a household’s earned income and how the members of that household report their feelings of emotional well-being (e.g. happiness). The 2010 study suggested once annual income exceeded $75,000 (national average), it would no longer positively affect the way in which the earner reported happiness.
Others have piggy-backed on this research and further refine it based on the cost of living differences among the states. Here are a few states that our clients will find most interesting:
- Massachusetts: $90,300
- California: $94,800
- New York: $100,800
Check the third link below for all 50 states.
My first reaction to these studies is just how low the tipping point for household income is relative to the average income of our client households. If you’re household earns more than double the tipping point, it stands to reason that a marginal reduction in spending is unlikely to make you miserable – at least not for long. And once you’ve adjusted, the savings produced could have a meaningful impact on how good you feel about the balance between your current lifestyle spending and how you’re pacing for your savings goals.
The original study also distinguishes between “emotional well-being” and “evaluation of life.” The correlation between the former and household income starts to drop off at a relatively low number, but the latter does continue to rise. For the purposes of financial planning, this is like having your cake and eating it too. With incomes in excess of the tipping point you have substantial flexibility to adjust lifestyle to create savings to achieve goals, and you benefit from increased levels of life satisfaction that comes from the additional earnings.