Relative Income a Better Predictor of Happiness than Absolute Income

Here are some interesting findings from Stop Acting Rich: ...And Start Living Like A Real Millionaire regarding income and happiness:

Professor Glenn Firebaugh is a leading authority on the influence that income has on happiness/satisfaction. Dr. Firebaugh has found that there is a significant correlation between income and overall satisfaction in life. He has found that "relative income" is a better predictor of happiness than "absolute income." [A quote from his research]:

"Richer [higher income] people tend to be happier. Experiments suggest, however, that what matters most is not income per se but income relative to the income of one's peers. Americans compare themselves to other Americans the same age, resulting in a hedonic treadmill because incomes in the United States rise over most of the adult lifespan. Rather than promoting overall happiness, continued income growth in rich countries could promote an ongoing consumption race where individuals consume more and more just to maintain a constant level of happiness."

If you have a higher income than most of those in your circle of friends, neighbors, and/or fellow workers, guess what? You are then likely to be higher up on the happiness scale than those of your social cohorts who earn relatively less.

Interesting stuff, huh?

I have to admit that I do this income (and net worth) comparison quite frequently. When I meet someone new I ask what he does for a living and try to estimate whether I make more or less than he does. If I make more (in my estimation), I feel "good." If I make less, I don't feel good. Same goes for net worth -- is his house as nice, is his stuff as nice, are his cars as nice, etc.? This comparison happens almost automatically and very quickly, but I am certainly aware of it. It's become less meaningful to me as I've gotten older -- now I'm more likely to simply be happy for the person who is doing better than I am -- but it's still there. It's a strange (and not very flattering) trait to have.

I have a friend who told me that he waits until the third or fourth time he meets someone before he asks what the guy does for a living. He said he does this because he's found there's no correlation between what someone does/earns and how good of a friend he'll be, and my friend doesn't want to make any judgments about a person based on these "meaningless" facts. It's an admirable objective IMO, but I'm not sure I could do it. Let's face it, we all spend lots of time at work. If we can't talk about what we do for 40+ hours a week that leaves out a big part of getting to know someone.

How about you? Anyone else out there make income/net worth comparisons to family, friends, neighbors, co-workers, etc. or is it just me?

Comments

[guinness416]

Absolutely not and I find that a bit weird to be honest. I do generally avoid the boring "what do you do for a living" question (it is easy and not admirable, try it). Ask people which neighbourhood they live in, do they have a family, how do they like that guinness they're drinking, are they going on vacation this summer, whatever - it's a much more interesting conversation! How could you tell from "I'm in sales" or "I work for microsoft" how much people earn/have anyway?!

[Rod Ferguson]

I don't compare to my friends and neighbors, mainly because I see them engaged in conspicuous consumption (and a nice house or a nice car is no indicator of wealth in my book). I know individuals who make twice what my household does in a year do who are leveraged to the hilt and are one financial emergency away from losing everything.

I do, however compare my current economic situation to past ones and anticipated future ones. I am doing much better than I was and am on track to doing much better than I currently am in the future. Both of these conditions make me happy :)

[Money Reasons]

Yeah, I confess, I trace this stuff too. But I usually try to compare myself against averages for someone like me. I'm kind of a statistics freak in that way...

So, the key to make friends that have a similar income and net worth! Kind of like getting Goldilock friends!

You want ones that aren't too rich (you don't want to look poor or be jealous), nor do you want friends that are much less poor then you are (your friends may get jealous)!

Interesting find!

[StLPastor]

An interesting question-as a pastor, I have to work against the reverse of the dynamic.
I meet most new people at church, and people who clearly have a much lower income than me suggest 'more work!' because most really poor people request a great deal of pastoral and church time and attention, let alone financial assistance. People with a much greater income than me mean 'stronger church finances!' and often are also engaged, participatory members of the congregation interested in building strong communities.
Obviously the gospel suggests this is completely backwards, but I notice that it is a struggle for me, and other pastors that I work with. At least it means I don't have to worry about jealousy much.

[a91030mom]

I'm friends with families that make less than we do, and more than we do and then about the same as we do. The interesting thing is that as someone else mentioned, you really don't have any idea what their true financial situation is. We have x saved in college they could have 0, 1/2 that or 2x, we don't know. Ditto for retirement.

I read lots of web sites like this to help me trim expenses. I cut my husbands and kids hair, we wash our own cars, I perm my own hair, we drive our cars to the ground. I house-swap for vacations, rather than pay for a hotel. I don't take my kids to the movies. (I do take them on lots of free fun outings). You get the pix. Someone might think we make 1/2 what we do.

I recently had a thought that we really won't know who has what 'til we're all retired, I think. Is the house free and clear? Are kids saddled with college debt or not? Do you get to vacation and enjoy retirement or are you petrified the washer might die on you and ruin you financially for 6 months?

It's a long road between here and there....

The only time it has really come up (well that I can think of right now) is this: I invited a family along on vacation once to a ski area and I had done a house swap for a very beautiful large house, more than enough room for all. I invited them to join us and they said they really wanted to but couldn't afford lift tickets or the gas $ to get there. They're a family of four and dive a LARGE SUV that seats 8, I think. I imagine filling that thing up week after week to run errands has to cost them 4x what our gas bill is, I could never to that....again to each his own priorities.

[Roger]

Something similar is at work on a national scale. The book Spirit Level details a large research project comparing many measures of social health (obesity, violence, academic achievement, poverty, creativity and many more) across dozens of countries.

The strong conclusion is that the happiest, healthiest countries are those with the most equal distribution of wealth, however that is achieved. Perhaps surprisingly, this applies to the rich as well. Inequality seems to create social tensions that have a bad effect on health and well-being.

[kt]

i dont have many people to campare my life and networth to; i only have one sibling and i am not so comfortable about talking about my finance situation with others

[Holly]

@ a91030mom:

Sounds a bit like our situation...I am presently at home and work hard to keep expenses down in order for us to be able to continue to save for retirement.

When I say that we can't afford something, it's mostly because I am working within a budget and feel badly when I go way over, even though the bills are always paid.

I am hoping to find part-time or full-time work so that we can go out and get more enjoyment out of life when those types of social opportunities arise (long weekends w/the family, etc.).

I do agree that yu certainly can't judge a person's financial worth simply by what he/she owns or does for a living. But given that I do not work (a paying job!), it's safe to say that we are trying our best to live modestly.

[jim]

I have to admit that I can be competitive about income at least in my mind. Random people I meet I don't much care what they make and rarely ask their professions. e.g. I've lived next to one of my neighbors for about 10 years and still have no clue what he does. For family I'm a little more prone to ask and wonder about incomes. I feel more competitive with my family members especially my generation. For some reason I'm particularly competitive about careers and income levels with my old high school peers. If I run into an old high school classmate then I will ask what they do and then do a mental estimate of their income.

[Rob]

I certainly do this, at least on a sub-conscious level. That is, without even thinking about that fact that I am doing it. But, at the same time, does it really matter?

Like a91030mom said (and as FMF has said MANY times on this blog), it does not matter how much you are making. If you are spending it all, whether it is $20k or $2 million, you are not going to be in a positive financial position.

[Pop]

"Same goes for net worth -- is his house as nice, is his stuff as nice, are his cars as nice, etc.?"

Apparently you've learned nothing from your own blog.

[Cara]

"If we can't talk about what we do for 40+ hours a week that leaves out a big part of getting to know someone."

You're kidding, right? Most people work at their jobs because they have to. I'd much rather hear about what people enjoy doing outside of work. Instead of "what do you do," how about asking "what do you LIKE to do"? As for me, I can't imagine a more boring topic than my job. I already spend 50 hours/week doing it. I don't want to waste a precious second of my own time talking about it. Seriously, who really cares about the minutae of solenoid valves?

[Old Limey]

Money cannot buy happiness, however a real lack of sufficient money can bring great unhappiness.

Having a more expensive & more prestigious car than someone else shouldn't make you any happier.
Likewise, having a more expensive home and furnishings than someone else shouldn't mean you're happier than they are.

True happiness is a state of mind that most people are only willing to discuss with a relative or an extremely close friend.
True happiness comes from your relationships and your state of mind.
Do you go home to a smiling face that is always glad to see you?
Do you have someone to share a good movie, the day's experiences, or a good meal, with?
Do you like what you see when you look in the mirror?
Is there a lot of stress in your life produced by money worries, a bad relationship, or a health problem of a loved one?
Only you know your true state of happiness and whether insufficient money is the real problem.

I enjoy serious conversations with others but you have to learn not to go past their comfort level.
I had an interesting conversation today with a new female member of my seniors' hiking group. It's interesting how conversations can start very casually and sometimes progress very quickly and other times fade just as fast. In this case I was very surprised to learn that the principal that gave this lady her very first teaching job was my next door neighbor, and that she worked with another teacher that is my wife's very best friend. It's a small world sometimes!

[JimL]

FMF,

I am just like you. I also can't see how the topic would not come up when most spend the greatest portion of their waking hours at work.

We just moved into a new neighborhood a couple months ago and had our first neighborhood party this past weekend. Without exception, every person would ask the following:

Where did you come from? Where do you work? What do you do/what position do you have there? How do you like the area and your job?

[Financial Samurai]

Pop, interesting observation!

I don't care, I don't ask, I think everybody is successful and doing well and I'm happy b/c of that.

Stop comparing so much FMF!

[Benjamin Bankruptcy]

I remember a quote I read once "men don't desire to be rich, they merely desire to be richer than other men" At least with research like this we can start to do some meaningful work to actually make people happier,

[TJ]

you can't buy happiness.

I'd trade all the wealth for the shot at being happy.

oh well, at least I'd rather be unhappy and "rich" than unhappy and poor.

[Mike Hunt]

I agree with several of the comments, money can't buy happiness but a lack of money can create unhappiness.

That said I've focused so much on building my net worth that it is common to benchmark against people better off so you can try to learn new habits to emulate - that is a good thing. The trick is not to feel superior to people worse off than you as that is a wrong conclusion. I am so used to being ahead of others in a similar age group that I'm shocked if I find out someone is doing far better at a similar age- it's because I'm living in a developing country and people get by on a whole lot less and still seem to be very happy.

For example my driver (paid for by the company) earns $400 per month and is very happy with this salary, and has managed to save up and buy a simple house in cash even though he is only 35 years old. The house in question was about $13,000 USD and was in a rural part of the country and can be described as very simple- small, no A/C, cement and wood with running water. However he owns it free and clear which is quite a contrast to those in the West who are spending a big portion of their salary on housing.

I earn 50 times the salary of my driver so one week of my work (before taxes) pays the same as a year of his efforts, I find that mind boggling actually. However thinking about this relative income doesn't make me happier but it does give me a sense of humility to hesitate before complaining when life throws a curve ball my way.

-Mike

[Steph]

hmmm, sounds like the secret to financial happiness to get more poor friends!

[MonkeyMonk]

I try not to make these assumptions on others because over the year I have learned just how meaningless they are. We're friends with a couple who we assumed made a *ton* more than us. Good-sounding jobs, fancy house & cars, lots of toys, vacations, etc. Then last year they declared personal bankruptcy and were forced to sell their home for a huge loss. We've never gone into the details with them but my basic understanding is that they were leveraged to the hilt with incredible amounts of debt and the minute the economy showed signs of trouble they couldn't make their payments.

These indicators are really flawed. If you really want to know your better off just asking people what's their net worth and investment strategies. :)

[MonkeyMonk]

I'm also a firm believer that money can indeed buy happiness. The catch is you don't want too much money *or* too little money. You need just enough money to meet your financial goals and to live a comfortable life. To me, happiness is never having to worry about money. I would worry if I had too little (how am I going to make my payments?) or if I had too much (what if I make a horrible investment and lose millions?).

[Kimberly Cole]

I think it's totally natural to be curious and make this comparison, especially early on in your career when you're still trying to make it or even figure out what you want to do for a living. It's impressive when you meet peers who already "have it together". I think it probably gets less so as you get older, like you said, but I think that most people whether they're conscious of it or not make a slight mental note when they meet someone who is very successful.

[Old Limey]

Mike:
I have had the same experiences as yourself many times in the developing world. The area that we made the most good friends with the locals was in Ubud on the island of Bali in Indonesia. We would get into conversations with the maids and houseboys in hotels or cottages where we would stay or sometimes with a driver whose car we had rented for the day and we would show a lot of interest in their families, their customs, and their lifestyle and before you know it we were being invited to be guests at a family getogether or ceremony. One experience was attending the dedication of a family temple which was a 2 day affair in which the whole village took part. There were religious ceremonies, cockfighting, gambling, balinese dancing, shadow puppets, playing of the gamelan, and huge feasts with pigs that were first blessed and sprinkled with holy water, killed, roasted, and then eaten along with a huge variety of other fruits and vegetables. All of the people were poorer than almost everyone in the USA but you would never know it by their happiness and friendliness. The extended family compounds were very simple, concrete floors, one large room per family, and an outside kitchen with a wood stove. Every family kept pigs and chickens and shared a rice paddy that had been in the family for generations. You have to experience life in a non-materialistic society to understand that happiness and money actually can be unrelated in such a lifestyle. One thing we soon learned was, "Don't admire something they have or they will end up trying to give it to you".