So why bother getting rich anyway? In my first post on budgeting, I point out that it’s possible for a person to get $10M by having a high savings rate consistently for decades, as if that should be obviously a good thing, and the massive sacrifice of all that delayed gratification was worth it. But are the rich actually happier? Do we live more fulfilling lives? Today, let’s take a break from the mechanics of budgeting and talk about why we bother with money at all!
Let’s start with the obvious. Modern life requires shelter, food, transport, healthcare,1 security, etc. And money definitely buys those things. At the personal level, being rich ensures that your supply of each of those things is mostly uninterrupted and of high quality. So being rich definitely removes some sources of unhappiness.
But can being rich actually make you happy? Perhaps you’ve heard that above a certain pretty moderate amount of income, being rich won’t actually make a difference. Well, in my personal experience, that’s complete hogwash, and I’ve got science to back me up!2
Happiness and a general state of wellbeing is the default state of humanity, in my opinion, if our needs are being met. However, we are a hopelessly needy species, and it’s also true that it’s basically impossible to meet our needs completely. Therefore, we increase our wellbeing not by adding goodness to our life, but by subtracting badness.
Obviously, bad things can happen even to billionaires. We are all of us weak hairless primates, and no amount of money can insulate our lives completely from random meteors, eventual death, or a hurled insult.3 So the central question around wealth, therefore, is how to find the best long term balance between delaying gratification to meet needs later, vs. spending to meet needs now. How much is enough?
What’s the actual relationship between money and happiness? Double the money, double the problems? Or double the money, double the happiness? Neither! If you are broke and I offer you $10K, that’s amazing! But if you have $1B and I offer you $10K, um, sure. Thanks? Economists call this a “decreasing marginal return,” or in normal human speak, your first dollar is worth way more than your last one. In fact, the happiness research appears to suggest there’s a logarithmic relationship. With each step up the ladder of wellbeing, it takes an exponentially higher amount of money. And I don’t mean that as a metaphor! Literally, each step up the ladder appears to require about 1.2x more than the last one! Without careful tracking people appear to not even notice unless their spending increases by 20%!4
Let’s start with a subsistence day laborer at the global line of extreme poverty, or about $2.15/day ($785/year). This person lives on the edge. Any disaster of even medium size, and they will literally die, especially if it strikes their whole community.5 Let’s define this as a 1 on the spending ladder. Sustaining this level of spending indefinitely without work requires about $22K invested permanently in the world’s capital markets.6 If they live in an average household size for the USA,7 they will need about $56K. (See rung 1 on the ladder below).
Where are you on this scale? Median household income in the USA is a bit over $75K, which requires $2.083M invested in the markets. On our ladder, that’s a bit above a score of 20. Again, this is without working. How about that family that saved up $10M? That’s a 29. What about your fabulously wealthy friend with $50M? About 38. Lastly, let’s put Jeff Bezos and friends on our scale. Actually, let’s do it visually, marking each rung with the net worth necessary to produce that income indefinitely.8
Net Worth $56K => Income $1,970/yr - Global Extreme Poverty Line.
NW $66K
NW $79K
NW $95K
$113K
$136K
$163K
$196K => Income $7,060/yr - About ~18M Americans lived below this line in 2022.
$235K
$282K
$339K
$407K => Income $14,640 - This is close to the USA poverty line for 2022, covering about 12% of the population.
$488K
$586K
$703K => Income $26K/yr. This is close to the Swiss poverty line in 2019. Almost 9% of the Swiss population is poorer than this. Also, only 1% of humans in 2018 were higher than this rung. If you are reading this blog, you are probably “The 1%,” at least globally.9
$843K
$1.01M
$1.21M
$1.46M
$1.75M => Income $63K/yr. This is a bit below the USA Median Household Income for 2022. Half of all American households fall below this line.
$2.10M
$2.52M
$3.02M
$3.63M
$4.35M => Income $157K/yr. The top 10% of Americans live here approximately or above.10
$5.22M
$6.27M
$7.52M
$9.02M => Income $325K/yr. The median family in the USA could make it to this level through a lifetime of saving intelligently in a single generation, and have enough time to enjoy it! They don’t, but they could!
$10.8M
$13.0M => Income $468K/yr. “The 1%” lives above this line, at least in the USA.
$15.6M
$18.7M
$22.5M
$26.9M
$32.3M => Income $1.16M/yr. “The 0.1%” lives above this line, at least in the USA in 2022.11 The air is getting pretty thin here, but there’s still over 33K Americans and a bit more in the rest of the world. Private jet rides are still a bit of a splurge here. The billionaires you see on TV are all still 30 times wealthier than this!
$38.8M
$46.6M
$55.9M
$67.0M
$80.4M
$96.5M
$116M
$139M
$167M
$200M
$240M
$288M
$346M
$415M - Sorry, I’m getting bored just typing all of these out! We’ll go by 10s from here.
$1.03B => Income $37M/yr. Finally a billionaire! So these folks are like, basically the same as Bezos, right? Wrong!
$2.57B
$15.9B - Surely we’ve hit Bezos, right? Wrong!
$68B - Approximate net worth of Satoshi Nakomoto at the 2021 peak BTC price.
$98.5B - Remember, Bezos can buy and sell this person several times over!
Pity poor Elon Musk, several rungs below Bezos. I mean, sure, his personal space program is better than Bezos’s, but Bezos owns the Washington Post and Musk’s Twitter acquisition just isn’t looking that hot. #hectobillionaireproblems
Finally we hit Bezos at just past the 87th rung on the ladder. Imagine how much he’d have if he’d been able to keep his marriage together!12
$1.5T - Bezos would need to move up the ladder just a bit to hit here. Alternatively, this is the entirety of the sovereign wealth funds for the country of Norway, which is just about the richest sizable democracy.
So what’s the takeaway here? First, money doesn’t guarantee happiness, but it sure looks correlated in a semi-causative way! (This is science speak for, “Yeah, it probably helps most of the time.”) Second, wasting your time worrying about your tax rate is obviously a waste of time. Do a bit of tax optimization, duh, but if you can move up 5 rungs through investing and earning, but only 1 to 2 rungs through extreme tax planning, don’t waste your time!
Next, understand that the richer you get, the poorer you will feel, and if you let it, that will really make you feel bad about yourself! After all, when there’s only ~30K Americans to hang out with in your 0.1% social circles, plus another few 10s of thousands globally, you’re going to rub shoulders regularly with someone who’s dozens of rungs above you! And you will never be as rich as they are, so get over it! The middle class get to hang out with their peers. The rich have to hang out with people who are much poorer or much richer than they are. Learn how to do it gracefully.
Lastly, understand when to quit chasing money! By the time you hit the high 30s on the ladder, you are a very, very rare person. You are already a high achiever. The difference between you and the next few rungs up is mostly luck. So count your very lucky stars, and focus on maximizing your enjoyment of what you have! I strongly believe it’s possible to move up your experience of the ladder through efficient spending. Stay with me on this blog, and we’ll go over how!
You’d actually be surprised how much modern medicine is worthless, as in it doesn’t really move the needle for a longer healthspan. Compared to other interventions like exercise, clean air and water, sleep, good relationships, a mostly balanced diet, etc., there's not much that healthcare is good for. That said, for the things that medicine is good at, when you need it, you need it.
https://www.pnas.org/doi/pdf/10.1073/pnas.2016976118 Note that for the poor sods in the bottom of the happiness distribution, adding money doesn’t seem to help. Probably they need to focus on fixing the other issues in their lives, or at least reaching peace with them.
And I’ve got at least a full blog post in me about the bad things that happen psychologically when a person tries to insulate themselves from criticism, deserved or otherwise! Ever wondered why smart, well resourced people make such obviously stupid decisions sometimes? Stay tuned!
I apologize, because I can’t find the paper to back this specific increment with a scientific reference, having read it years ago. However, even if the actual number is 1.05x, or 1.8x, it will change the labels on the ladder, but not the relative placement of things on it, or the relationship between money and happiness and wellbeing overall. The overall argument stands. (https://www.pnas.org/doi/full/10.1073/pnas.2208661120#:~:text=The%20correlation%20between%20average%20happiness,on%20a%20100%2Dpoint%20scale.)
This is part of the reason why earthquakes and storms that don’t even make the news in developed countries can turn the poorest cities into Hell on Earth. They simply have no spare capacity of any sort.
No, of course no one is living on the global extreme poverty line based on money invested in the markets! This is how much would be required to hit that income.
Hint, they probably won’t live in a household that small, in order to save money, but let’s not complicate things.
All rungs on the ladder are approximate, because we’re not adjusting for purchasing price parity, taxes, household size (we’re assuming all households are sized 2.51), etc. But because this is an exponential scale, it’s extremely forgiving of these kinds of problems. Labels might be a rung or three off, but they won’t be 30 rungs off. We’re also using a 3.6% safe withdrawal rate to convert from net worth to a perpetual income without working. Folks who are older can use a much higher withdrawal rate if they are willing to spend down their capital and don’t want to endow their heirs, so the net worth numbers should be thought of as how much money a person would need to live at that rung for the rest of their life if they retired in good health before around age 50.
And we’re not even counting the ~100B humans who ever lived, the vast majority of whom lived hand to mouth and therefore were probably living below a “5” on our scale.
Thus proving conclusively that divorce is the most expensive thing you could possibly do, no matter who you are. But given how important sustained committed relationships are to being a hairless primate, marriage is usually worth it!