Are You Financially Comfortable?

Financial comfort

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Credit Sesame reviews a recent study that investigated how much money you need to be financially comfortable. Do you qualify?

To answer that, you need to go beyond thinking of being financially comfortable as a number. You have to think about your own attitude towards wealth and where you stand in relationship to your goals.

A good starting point for an examination of whether you are financially comfortable is the recent Modern Wealth Survey by brokerage firm Charles Schwab. This polled 1,200 adult Americans about their attitudes towards wealth, and how they felt about their financial situation.

Based on their responses, Schwab calculated the average amount of net worth it takes for people to consider themselves financially comfortable. They also found that this number varies a great deal depending on where people live.

Beyond regional differences though, putting a single number on what it means to be financially comfortable is a tricky business. This article will look at the question from a few different angles.

What amount of money is considered financially comfortable?

The Schwab survey made a distinction between “wealthy” and “financially comfortable.” Wealthy is considered a higher standard. This is like the distinction between being considered rich and being reasonably well off.

The survey found the average amount of money people said was necessary to be financially comfortable in 2022 was $774,000. In contrast, survey respondents said it took an average of $2.2 million to be wealthy.

Both figures are up from last year’s survey, but still below where they were prior to the pandemic. In other words, the pandemic seems to have lowered people’s expectations of what it means to be financially comfortable or wealthy.

The numbers also varied sharply depending on where respondents live. For example, the average amount of money needed to be financially comfortable ranged from a high of $1.7 million for respondents in the San Francisco area to a low of $671,000 for those in Denver.

Why financially comfortable is more than a number

So, if you have more than $774,000 should you feel like you have it made? Or should you feel left out if you have less than that?

As tempting as it is to measure yourself against other people, when it comes to your financial security wealth is very much a matter of your circumstances.

Whether the $774,000 people say makes you financially comfortable is enough to be set for life depends on several conditions. Even the $2.2 million dollars that people consider wealthy may not be enough.

The following sections will explain some of the variables you should consider. These should factor into how you assess your current wealth and how you set goals for the future.

Stage of life

There’s a big difference between having $774,000 in your early 20s and reaching that figure in your 60s.

A young adult with that amount of money could certainly be considered off to a great start financially. After all, they’d presumably have their peak earning years ahead of them and lots of time to add to that nest egg.

In contrast, someone on the verge of retirement with the same amount of money may not feel nearly as comfortable. Using moderate assumptions about investment returns and inflation, $774,000 would provide the equivalent of $50,000 a year in spending (adjusting for inflation each year) for less than 18 years before being used up.

A $50,000 budget may not make for a particularly comfortable lifestyle, and 18 years might not be enough to see a person all the way through retirement.

So, when you evaluate how much money you have, an important thing to consider is whether you’re still adding to that figure, or if you’re closer to drawing it down.

Income versus expenses

How well set you’d be with $774,000 also depends on your income and expenses. If you’re earning more than you spend, that money will go further because you’d still be adding to it.

In contrast, if you’re spending more than you earn, that $774,000 might look shakier because it’s on its way down.

Even if you’re currently earning more than you spend, if your expenses are high $774,000 might not last you as long once you retire or if you have a career setback.

So, your financial security has as much to do with your earning power and your lifestyle as it does with the amount of net worth you’ve accumulated.

Future goals

Financial comfort is also a function of your aspirations. If you own a small home and live frugally, it would probably take less money for you to feel comfortable than someone with dreams of a more lavish lifestyle.

Besides things you want for yourself, your future goals might have a lot to do with your kids. Understandably then, a family with five kids would need a lot more wealth to feel financially comfortable than a childless couple.

So, when you assess your financial status, think of it relative to things you plan to do in the future. This may include accounting for the needs of your children, or of the kids you plan to have.

Tax status

Another thing that can complicate measurements of net worth is the tax status of the money involved.

Comparing after-tax savings with tax-deferred retirement savings is like comparing apples and oranges.

If you have money in a tax-deferred retirement plan like a traditional IRA or 401(k), you will have to pay tax when you take money out of the plan.

In contrast, if you have an ordinary savings account or a Roth IRA or 401(k), this money has already been taxed.

When assessing your net worth, a dollar of after-tax savings is worth more than a dollar of pre-tax savings. That’s because that dollar of pre-tax savings will be reduced by the taxes you’ll have to pay before you actually get to use it.

Don’t get too comfortable

Here’s one final thing to remember about defining your financial status according to your net worth: things can change.

Looking at your net worth at any point in time is like taking a snapshot. Life, however, is more like a moving picture.

Kids, career setbacks or promotions, investment losses or windfall gains and many other plot twists may be in your future.

Plus, economic conditions may have a lot to say about how much you need to be financially comfortable. As people are rediscovering this year, inflation can quickly erode the value of your money.

So, if you’ve reached a certain net worth threshold, congratulations. But don’t get too comfortable, because that number and how well it meets your needs can change before you know it.

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Disclaimer: The article and information provided here is for informational purposes only and is not intended as a substitute for professional advice.

Richard Barrington
Financial analyst for Credit Sesame, Richard Barrington earned his Chartered Financial Analyst designation and worked for over thirty years in the financial industry. He graduated from St. John Fisher College and joined Manning & Napier Advisors. He worked his way up to become head of marketing and client service, an owner of the firm and a member of its governing executive committee. He left the investment business in 2006 to become a financial analyst and commentator with a focus on the impact of the economy on personal finances. In that role he has appeared on Fox Business News and NPR, and has been quoted by the Wall Street Journal, the New York Times, USA Today, CNBC and many other publications.

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