How much money do we need to be happy?

We ask ourselves this question: Can money really buy happiness? If so, how much money do we need to have to be happy? For us, that number is $1 million US dollars, which we hope to attain in just another 3-4 years of working, before we turn 33 and 30 respectively. Beyond that, more money might open up a few non-essential options and doors for us, but would probably not increase our happiness unless giving that money away to people who need it more than us generates even more happiness for us.

What does a million dollars mean to you? How about $10 million? Most people would think of purchasing bigger houses, better and faster cars, nice boats, yachts, sails, etc. For others it might be endless vacations on the beach or somewhere else. How does your response change if you had to work hard to earn that million, rather than just win it through the lottery?

How much money do we need to be happy.jpg

For us a million dollars means only one thing: it's $40k in repeating dividends and interest income via the stock market year-over-year. There's a growing body of research on the 4% rule that shows how you can reliably withdraw 4% of the starting value of your portfolio year-over-year without depleting your portfolio's base principal. The portfolio will continue to produce enough appreciation through capital gains and dividends to last pretty much indefinitely. Looking back at the last 100 years, this 4% rule has worked in 96% of cases.

Why is $40k such an important number for us? Because that's how much money we need to live a good life in a city of our choice. At a 10% tax rate on capital gains and qualified dividends (in Canada), we'll be left with $36k in usable money year-over-year (inflation adjusted). Our current conservative projections estimate we'll need $35k to lead the same kind of lifestyle we do now.

The beauty of capital gains and dividends is that the money is entirely passive. This means that once invested, we don't have to do anything special or extra to make this money keep coming in. We just setup monthly transfers of 0.33% (4% / 12) of our portfolio to go into our checking account and this works like our salary.

Passive income is powerful because it frees you up from having to work. When your passive income is equal to or higher than your annual expenses, you achieve a notable point in your finances known as financial independence (FI). Financial independence is true happiness for us since you're no longer required to do anything in life. And when you're not required to do anything, you could pretty much do whatever you want in life, as long as you keep your expenses within that $40k/year limit.

For instance, if you wanted to master chess, you could pour all your time into that. If you wanted to become great at cooking, you could spend 2-3 hours cooking every single day. You don't have to provide accounting of your time to anyone but yourself. That is true happiness to us. The ability to do whatever you want, whenever you want. To us, independence is happiness. No more waking up, showering, and getting ready for work like a robot on auto-pilot. When you're FI, no one cares if you shower at 9AM, 2PM, or 8PM. No one even cares if you shower at all, except perhaps your spouse and others you live with.



In the beginning, money can increase the quality of your life substantially. It can help counter the effects of bad weather, it can help you move to a better place with better weather and city amenities, perhaps improve your living conditions or commute, or help you buy healthier and better food. Money could also buy you a gym membership so you can exercise often even in bad weather. All of this could provide you with happiness.

But after a certain point, more money does not mean more happiness. This is one of the most unfortunate realities of our world and of being human. But it is also the greatest equalizer of all time in that someone who is 10x richer than you is no where close to being 10x happier than you. They cannot be happier than you simply with more money. In fact they might even be less happier than you since they now have to worry about managing and investing all that money properly. The diminishing utility of marginal returns is the ultimate economic/life force that keeps our world and sociology in balance. It makes us humans cherish the concept of enough.

More money does not necessarily mean more fulfillment or happiness. Image from Your Money or Your Life.

And for us, that point of enough lives at $1 million US dollars. We don't want fancy cars, we just want to be able to do whatever we want with our time, without having to be answerable or accountable to anyone except ourselves. Happiness to us is to be able to live a balanced life free of worry and purpose, focusing on the 4 F's that actually matter to us - food, fitness, finances, and frugality. Indeed, this is the FI life that so many people can only dream of, while others are well on their way to achieving it with just a few simple hacks.

The only way to figure out how much money is enough for you is to build a bottom-up budget from scratch. Start from $0 and write down how much your basic expenses are in a given year by keeping track of every single transaction on a spreadsheet. We did this hyper diligently this year and discovered we only needed $18k/year ($9k/person) to sustain our lives without any housing or travel costs. Housing can be tweaked easily by just moving to a cheaper city, anywhere in North America or Asia. We've budgeted another $20k/year (~$1650/month) for housing. Thus our budget for expected spending in retirement is only $38k/year for the two of us. Take this number and multiply it by 25. That's $950k. That's how much your net worth needs to be in order to sustain your life forever. Track your net worth and ask yourself how long before you get there. And what can you do to speed it up? This is your FI number and is the only sure fire path to long-term happiness because you're eventually going to get tired of going into work day in and day out for the rest of your life.

Doing the math takes the guesswork out of achieving financial independence. Unless you track your expenses and reduce them to the bare minimum, you'll never be able to accurately answer the question How much money do I need to be happy?  Until we did the math ourselves, we fantasized about winning lottery tickets, getting lucky with huge equity windfalls through a hot Silicon Valley startup exit, etc. Without the math, you let the world dictate what your happiness number is. Would you feel rich at 5 million dollars? Or 10 million? Amassing 10 million dollars seems so out of reach, it's depressing. But, building a bottom-up budget makes you realize you hardly need all that much money to lay the foundation for a happy life. It's not about the boats, yachts, cars, or sails. It's about not having to waste 9 hours a day, or one third of your life, going into work, doing work you don't really enjoy, with people you don't really care about. Every single day.

Mr. Frugal Hacker

Born in India. Grew up in Dubai for 15 years. Studied and lived in Canada for 8 years. Backpacked in Europe for 2 months. Lived in Toronto for 1.5 years. Working in San Francisco for the past 4 years. Runner, cyclist, software engineer.