The Ideal Annual Income: Beyond the Median

When economists and policymakers talk about income, they often turn to the median rather than the average. This shift is not without reason, as the median provides a more accurate reflection of the typical earnings in a given country or region. In the United States, for example, the median income in 2017 was approximately $35,000. This figure stands in contrast to the average income, which would likely be significantly higher due to the impact of a few multimillionaires, skewing the data towards a higher value that does not truly represent the earnings of the average person.

Understanding Median Income

The median income is determined by lining up all annual salaries from smallest to largest and finding the middle value. In other words, the median is the income at which half of the population earns less and half earns more. This method eliminates the distortion caused by extremely high incomes, providing a better gauge of the typical person's earnings.

Income Variability Across Countries

While the median income in the United States holds important information, it is worth considering the ideal annual income relative to local living costs in other countries. Here are a few examples, determined roughly based on the national minimum salary, average salary, and happiness coefficients:

Portugal - 28,000 Spain - 30,000 France - 60,000 UK - 60,000 India - 6,500 Indonesia - 12,000

These figures reflect a rough calculation and may vary widely based on personal circumstances, but they are useful for determining what constitutes an ideal annual income in terms of achieving a comfortable and happy life.

Defining Ideal Living Standards

The concept of an ideal annual income goes beyond mere numbers. It is about being able to meet basic needs, save for future goals, and enjoy a stress-free retirement. A common rule of thumb is that after reaching a certain level of income, additional money does not significantly increase happiness.

For instance, let’s consider a scenario where an individual makes $250,000 per year. However, it would be more beneficial to target an annual income that enables one to pay off all debts, save a significant amount of money, and contribute towards retirement and investments. Here’s a structured approach:

Pay off all credit card debts. Save $1,000 per month. Contribute $1,686 per month to a 401(k) or SEP (Self-Employed Pension). Double or triple this contribution up to age 50. Cut living expenses to 500 square feet per person for a more manageable lifestyle.

True Happiness and Financial Goals

Charles Dickens’ classic novel David Copperfield offers a poignant illustration of this concept. Mr. Micawber advises his young friend David that if their annual income is ￡20 and their annual expenses are ￡19.96, the result is happiness. If expenses exceed income, the outcome is inevitably unhappiness. This principle applies to individuals of any era, suggesting that financial cushion and stability contribute more to overall contentment than high net income.

Conclusion

The concept of an ideal annual income is not just about financial wealth but also about achieving a balance that leads to happiness and well-being. Countries like Portugal, Spain, and the UK with a median income around $60,000 may set a high bar, but an individual’s ideal income should be tailored to their local context, financial goals, and personal values. By focusing on saving, investing, and managing expenses, one can achieve a more fulfilling and stress-free life.