Every year since 2017 (and twice in 2020), Charles Schwab’s Modern Wealth Index Survey has asked 1,000 Americans about what net worth they would need to be financially comfortable and what net worth they would need to be wealthy. You can see how their answers have changed over time in the graph below.
The net worth threshold for “wealthy” has not changed much in recent years
Based on the responses, the net worth required to be wealthy remained relatively unchanged from 2017 to the beginning of 2020, hovering around $2.5 million. After the onset of the Covid-19 pandemic, however, the number dropped significantly down to around $2 million. That said, it is possible that the pre-pandemic 2020 number was an outlier, as the number had already begun to drop slightly from 2018 to 2019, which would make this decline a longer-term trend. It is unclear what survey respondents are basing their estimation on. My guess would be that they are thinking about recent general recommendations for the amount of money needed to retire comfortably, which is usually slightly over $2 million.
The net worth thought to be needed to be “financially comfortable” has drastically declined
More interesting to me is this concept of “financially comfortable.” According to the survey respondents, the net worth needed to be financially comfortable has been consistently declining from a high in 2018 of $1.4 million all the way down to $624,000 by February of 2021. That’s a decrease of over 50%! Based on their press release, they suggest that the recent decrease is due to a recalibration of finances because of Covid-19, but I am doubtful that this is the full story since the downward trend has long preceded the pandemic. What the real explanation could be is hard for me to say. More research is needed to determine what has changed with Americans’ finances since 2018 to make them feel more comfortable with less money.
What makes a person financially comfortable?
Unfortunately, Schwab makes little effort to define financially comfortable, although in the 2018 version of the survey, they do ask people to define wealth and what makes people feel wealthy on a day-to-day basis.
Most people feel that living stress-free and with peace of mind is what it means to be wealthy. It makes sense that wealthy people would not need to worry about money (although that’s easier said than done). I could also see this as a definition of financially comfortable, as anyone comfortable with their finances would not need to worry about their regular expenses.
Some of the other responses, such as “being able to afford anything I want” and “having lots of money,” are more explicitly about being wealthy. Other responses seem less about financial wealth and more about personal wealth (“loving relationships with family and friends,” “enjoying life’s experiences,” and “having good health”). However, it is true that having money can help with each of them, even if it’s not the main focus.
In terms of feeling wealthy in day-to-day life, the top responses (“spending time with family” and “taking time for myself”) as well as “having a busy social life” are not explicitly about financial wealth, although it is true that in order to have time to spend with family or friends or to take for yourself, you would need to have a good enough job or enough money. It’s hard for someone working multiple jobs to scrape by to have any free time.
The third most popular response, “owning a home,” is one that I do think is important for both wealth and financial comfort. People who own their home have a median net worth 40x greater than those who rent, which you can see in the net worth and income infographic I created. Owning a home allows you to build home equity as you make mortgage payments, which increases your net worth, while rent payments are merely an expense which does not contribute to your net worth. Owning a home also provides a sense of security which is essential for financial comfort.
The rest of the responses are all about taking advantage of niceties, whether they be dining out, having the latest tech gadgets, or being a member of a gym. They all require people to have some money to spare.
What does it take to be financially comfortable?
Since the Schwab survey did not provide many specifics about what financially comfortable means, I decided to look elsewhere. I ended up finding a different survey by the Skipton Building Society, conducted through OnePoll. This survey asked 2,000 adults in the U.K. about the top signs that they are in a good place financially. Unfortunately, I was unable to find the raw data, but you can read the press release here. That means that I can see the top 30 signs people picked, but I have no idea how many people picked each one. Regardless, there are some commonalities between the responses that I think are illuminative about what it takes to be financially comfortable.
1. You need to have built up some savings
The first commonality that I noticed was that many of the responses all required people to have built up some savings. In order to be financially comfortable, you need to save enough money that you are no longer living paycheck to paycheck. You need to have money set aside to deal with any emergencies that may pop up, whether medical issues, house or car maintenance, or other problems. You also need to be able to treat yourself from time to time, because what’s the point of having savings if you never get to use it? Of course, moderation is key there or your savings will quickly dwindle away.
2. You should have enough money that you don’t need to worry about it regularly
Similar to the results of the Schwab study for personal definition of wealth, not being stressed about finances was another commonality in this survey’s responses. This goes beyond just saving enough to avoid living paycheck to paycheck. To be financially comfortable, you need to have enough money that you can buy things you want without worrying about the expense. This doesn’t mean you need to be reckless with your money. Obviously big purchases should still be carefully considered. However, in your daily life, you should be able to buy what you want without worrying about breaking the bank. You also need to be able to afford to go on vacation, having both enough money and enough free time. If you always need to be hard at work in order to survive, you are probably not financially comfortable.
3. You need to pay off your debts
The third commonality I found was that you need to eliminate debt. This is good advice in general, but particularly if you want to be financially comfortable. Start by paying off high interest debt (such as credit card debt), and then pay down your other debts. It’s particularly comforting to pay off your mortgage, as this eliminates a large expense from your monthly expenditures and can allow you to direct your money more towards savings or wants instead.
4. You need to be financially literate
The final commonality I noticed in the survey responses was that, in order to be financially comfortable, you need to be knowledgeable about your finances and know how to manage your money. You need to budget monthly (see how to budget in Excel here), and you need to make sensible spending and financial choices. You need to understand and make use of the power of compound interest through investing (learn why you should start investing young here). You should also make a plan for retirement. If you understand your finances, you can be confident about reaching your financial goals. If you’re reading this article, you’re already off to a great start.
So what should you do to become financially comfortable?
Based on the surveys, there are several things you should do to become financially comfortable. First, you should learn about your finances and how best to manage them. Consider subscribing to this blog, since that’s what we focus on. Second, you should use your newfound financial knowledge to pay off debts and start saving money. Congratulations, you’re well on your way to becoming financially comfortable!