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Investing Answers Building and Protecting Your Wealth through Education Publisher of The Next Banks That Could Fail

How Much Money Makes You Happiest? Princeton Has An Answer

With all of the discussion about the widening income gap in America, you may be wondering where you fall in the equation. Are you earning enough to keep up with the cost of living or do you need to make more to stay apace and live without serious financial stress?

In other words, how much money does it take to be happy?

Proving that, in a way, money really can buy happiness, recent research at Princeton University showed that emotional well being gets better as your income gets higher. At the same time, making a very low income can make a negative situation feel worse. Things that bring down emotional well being -- such as poor health, divorce and being alone -- caused greater emotional harm among those who lived in poverty. But the more money you have doesn't necessarily mean you are happier.

While the study shows that more money correlates with more happiness, happiness only increases with higher income to a certain point. That's why the findings don't mean that someone like Warren Buffett, for instance, is jumping with joy every day because he's among the wealthiest people in America. The link between money and happiness is more nuanced than that.

The Princeton researchers define happiness in two ways: life evaluation, which refers to satisfaction gained in thinking about your life; and emotional well-being, "the frequency and intensity of experiences of joy, stress, sadness, anger, and affection that make one's life pleasant or unpleasant," according to the study.

So we can guess that Buffett is probably pretty pleased with his wealth, but it's not necessarily a source of day-to-day giddiness.

Another reason the famous investor isn't necessarily the most exuberant person in America is that the gains taper off at a certain level reached by about a third of U.S. households in 2008, the year of the data in the 2010 study.

All this makes you wonder: How much money is enough? How much money does it take to be happy?

The researchers found that money has a positive effect on well-being, but not beyond an annual income of about $75,000. But statistics like these can only go so far in guiding you, experts say. If you support a family in a high-cost city like New York or San Francisco, you may be struggling on $75,000 a year, unless you're extremely frugal. But that same income may give you a lot of spending power if, say, you've opted for small-town life in the Midwest.

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Here are some questions to ask yourself to evaluate whether you're earning enough to be happy.

How does your income compare to your outstanding debts? Xavier Epps, owner of XNE Financial Advising in Woodbridge, Va., believes that you'll be in good shape if your income is about 25% of all of your debts (including your mortgage, car payment, credit cards and student loans). So, for instance, if you have borrowed about $250,000, you will need to make $62,500 to avoid economic stress.

"I have clients who have $400,000 in debt and earn 16% to 17% of that amount, and they are miserable," Epps said. If your debt levels are too high, you've got two basic choices to improve your situation: Earn more by taking a part-time job or pay down your debt quickly by cutting back on spending and perhaps by refinancing, he said.

If you're one of the fortunate few who have no debts of any kind, you can, of course, live very well on a lower salary than others who must make significant monthly payments on mortgages, loans and the like, Epps said.

What is the cost of living in your state? Housing, health insurance premiums and taxes can eat up a significant chunk of your income in high-cost states like New York, New Jersey and Massachusetts, so you will need to earn more to live comfortably there, Epps said.

How is your health? Dealing with serious medical conditions can be expensive, even if you have health insurance that covers many of the costs involved.

"You can be happy in Arkansas with $60,000 or in New York with $150,000, but if your health deteriorates, you're going to need a whole lot more," Epps said. Of course, it's hard to ramp up your earnings aggressively after you or a family member becomes ill, so it helps to have a generous emergency fund saved in these cases -- something you should be able to build if your debts don't exceed 25% of your income.

What do you value in life? To arrive at the income level you need to be happy, ask yourself what operating principles drive your life -- and then use them to guide your spending decisions, said Stephen Goldbart, a licensed clinical psychologist, co-founder of the Money, Meaning and Choices Institute in Kentfield, Calif., and author of the book "Affluence Intelligence." Many people get caught up in buying things that, in the big picture, don't matter all that much to them because they've gotten accustomed to the earnings of a two-income couple.

"If you look at people's spending habits in large metro areas, you'll find that there's a lot of spending going on that didn't happen 50 years ago," he said. "We've become aggressive consumers, spending way more than we're saving in a way that traditionally, Americans did not."

Changing your lifestyle to reflect deeper goals that have nothing to do with, say, having the hottest smartphone or driving a new car -- such as raising a family in a safe, secure environment -- can raise your satisfaction with your life.

"We've seen people who have taken lower-paying jobs and moved to a small town and have been far happier than when they lived in a big city," Goldbart said.

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What are your long-term financial goals? It's easy to fall into the trap of living paycheck to paycheck, no matter what your income, if you're focused mostly on the short-term picture. It's human nature to want the same things as the people who are a notch above you, income-wise, said Dean Bahniuk, a financial advisor based in Coconut Grove, Fla., and author of the book "The Art of Wealth."

"I work with a lot of doctors who make $400,000 a year, and they're broke," Bahniuk said. Why? They get caught up in buying things they think that successful people should have, such as big houses, two cars and private schools for their children, and often can barely keep ahead of the debt collectors, he said.

To live prosperously, it's important to avoid spending to keep up appearances and put some of your income to work for you in savings and investments, financial advisors say.

"You've got to educate yourself that, 'Hey, I might not have the coolest things, but what's cool to me is that if I get fired, I'm not going to have to come home and explain to my kids that I'm broke,'" Bahniuk said. You might be surprised at how much less you need to earn to be happy if you're able to keep the big picture in mind.

The Investing Answer: There's no hard-and-fast rule about what you need to earn to enjoy your life. While having a household income of at least $75,000 can cushion some of life's blows, building habits like living below your means and saving for emergencies can reduce the pressure to keep going after ever-higher paychecks so you can finally be happy.