How debt affects the income to happiness ratio?

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Debt and Un-Happiness

Rick Kahler MS CFP

By Rick Kahler CFP®

I have written previously about the plethora of research that shows a link between income and happiness.

Most of those studies find that the more money people bring in, the happier they are—until earnings exceed $75,000, at which time the correlation declines.

What I’ve never thought to address when I have reported on these studies is how debt affects the income to happiness ratio. I inherently assumed that the income level was free of consumer debt, meaning the individual lived on what they made. The only debt I assumed was a mortgage payment, that also included property taxes and insurance, of no more than 25% of income. This means a family earning $75,000 has a maximum housing cost of 1,500 per month.

In Rapid City, SD, that will get you a very comfortable, upper middle-class home or rental.

Further, I assumed any increase in income meant no corresponding increase in consumer debt. A few comments from readers who didn’t understand my unwritten assumption opened my eyes.


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One man—I’ll call him Sean—said my data must be flawed.

For him, a significant increase in income when he graduated from college did not increase his well-being but actually created increased ill-being. When Sean graduated from college he was earning $20,000 at his minimum wage job but had no debt. Upon graduation he secured a position paying $70,000 a year, which theoretically should have had him doing a financial happy dance.

Here’s what happened instead:

He upgraded his paid-off clunker for a brand new car, taking on a $45,000 debt with an $823 a month payment. From dorm living at his state school of about $500 a month, he went to a $1,500 a month mortgage payment on a starter home he bought for $225,000 with a $25,000 down payment gifted to him by his grandparents. To furnish the house, he ran up a $20,000 balance on his credit card, which meant monthly payments of $750. His student debt of $80,000 kicked in, with payments of $750 a month. That’s $3,323 a month in additional spending, or $39,876 a year, and a total debt of $345,000. That means his $70,000 new job was actually the equivalent of earning $30,124 a year with no debt.

No wonder he wasn’t happier.

The Studies

A study from Purdue, “Debt and Subjective Well-being: The Other Side of the Income-Happiness Coin,” published in the Journal of Happiness Studies, finds my hunch was right. More income coupled with more debt does not mean more happiness. In fact, as in Sean’s case, it often means just the opposite.

The study specifically targeted the impact of college loan debt on students who had been out of college and in the work force for seven years. The study found the higher the debt to income ratio, the lower the overall happiness.

In another study from the University of Wisconsin-Madison, “Household Debt and Adult Depressive Symptoms,” researchers Lawrence M. Berger, J. Michael Collins, and Laura Cuesta found that consumer debt is positively associated with ill-being and greater depression. The groups most affected by consumer debt are those less educated or who are approaching retirement age.


My recommendation for financial well-being is that, if you have to borrow to buy something other than real estate, don’t.

  • Keeping your financial obligations to a sensible amount of long-term housing debt is the best foundation for building financial well-being.
  • Don’t let an increase in income lure you into an increase in debt.

When you keep your consumer debt load small, earning more money is much more likely to increase your overall happiness and well-being.



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One Response


    There isn’t much point in being envious of someone earning millions of dollars a year who isn’t any happier than the rest of us. I recently reported on research that suggested avoiding debt is an important component in whether earning more money leads to more happiness. This supplements previous research that shows increasing one’s income to around $75,000 a year does increase happiness.

    Of course, income and debt levels aren’t the only job-related factors that can significantly affect our happiness. Besides earning more money, there are other things we can do to foster both financial and emotional health. Here are just two of them.

    One bit of research suggests the unhappiest portion of the day for many people is their daily commute. People in heavily populated areas can spend 1-3 hours a day commuting. Obviously, one of the best ways to increase your happiness is to shorten a long commute.

    The obvious way to accomplish this is to move closer to your work. If your work is near the costly real estate of a big city center, however, your living costs would skyrocket. Many workers have solved this problem by moving their work closer to them. That could mean finding a new job closer to home or moving your job into your home. An increasing number of employers allow employees to work from home part-time and even full-time. If your current employer isn’t one of them, perhaps you can find another company that’s more flexible.

    Maybe the best option, however, is to move to Rapid City, SD, where a long commute is 20 minutes and means you live “out of town.” Thirteen years ago I did just the opposite and extended my commute from three minutes to 11 minutes by moving to the outskirts of town. I agonized for a few weeks, but eventually got used to the extra eight minutes, which were filled with talking to my children when I took them to school in the morning and being entertained listening to Tom Hartman on my drive home.

    Another way to increase your happiness is to do work that fulfills you and which you are passionate about. It’s really hard to be unhappy when we are playing and having fun. I’ve often thought that one of the Beatitudes ought to have been, “blessed are those who have jobs they love and find fun.” Based on my experience, most Americans are not fortunate enough to be doing work they love and find fun. Making a good income doing something that feels like play is an amazing blessing.

    Two times in life especially lend themselves to aligning your work with your passion. The first one is when you are young and free from the pressures of providing for a family. Career changes are made more easily and lifestyles are typically less demanding, which allows for more risk-taking. The biggest downside is that it isn’t easy knowing what your real passion is during the first half of life.

    The second period is when you are older, really know what your passion is, and have the financial independence to do it. Unfortunately, this period of life is often called “retirement.” If you do work you don’t care about for decades in order to follow your passion in retirement, you risk not having the health or other resources to fulfill your dreams when the time comes.

    It’s worthwhile to spend time in early adulthood pondering and exploring to discover what work feels like play for you. Often, work you care deeply about can lead to more income as well as more job satisfaction—doubly increasing your happiness.

    Rick Kahler CFP®


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