Many of us dream of being wealthy, but what does that actually mean? Is there a certain dollar amount in the bank that propels someone into the “rich” category?
To answer that question, personal finance site GOBankingRates conducted a survey and found that Americans have different opinions on the matter. Over 35% of respondents said that to be rich, you’d need a net worth of $1 million or more. On the other hand, 24% said that someone with a net worth of $500,000 or more could be considered rich. And 20% insisted that you’re not rich until you have a net worth of $10 million. Yikes!
But here’s the thing about net worth: You can have one that’s higher than the aforementioned thresholds and still struggle financially. Yes, even people worth millions of dollars fall victim to financial mismanagement and wind up stressed out and miserable. So rather than focus on a single dollar amount to define wealth, a better bet might be to get to a place of financial security, whatever that means to you.
Getting a handle on your finances
I’ve had people in my life say things like, “If I won the lottery and added $5 million to my bank account, I’d be all set.” But the reality is that they wouldn’t be. Why? They’d have no idea what to do with that money and would likely blow through it quickly.
The problem with having more money is that being in that position tempts you to spend more. On the other hand, if you focus on building enough net worth to be comfortable and eliminate financial worries, you’ll land in a much happier place — one where you’re not doubting yourself or stretching your budget to keep up with the Joneses.
Take retirement, for example. You’ll often hear that to retire rich, you need a cool $1 million. Plenty of seniors, however, retire on far less and still enjoy their later years to the fullest. So before you get your mind set on a single number, think about the things you want to do in retirement and what it will cost to maintain the lifestyle you’re seeking. Maybe you can retire wealthy with $400,000 in savings. It’s really all about choices and priorities.
Of course, there’s nothing wrong with setting financial goals for yourself and working toward them. If you want to accumulate $1 million in savings, whether for retirement or just in general, go for it. But don’t just pick that $1 million target because it sounds impressive. You might do just fine in retirement with $800,000 in savings, and if that’s the case, there’s no need to beat yourself up over the fact that you didn’t meet your initial goal. (Besides, if the market has a downward swing right as your career wraps up, you might see your savings balance plunge out of nowhere. It’s unfortunate, but it can happen.)
On the other hand, don’t get too comfortable with having saved $1 million, either. Maybe having that money in the bank, or in your IRA or 401(K), will make you feel like you’ve made it. But if it turns out you need $1.5 million to live the lifestyle you want, you’ll need to get on board with making sacrifices.
That’s why I’m not a huge fan of fixating on a single universal savings goal. Rather, I believe in figuring out how much wealth you need to live comfortably and securely at various stages of life, and aiming to strike a good balance between spending and saving.
For example, I’m a fan of saving 20% of your income for retirement. To me, that’s enough to make respectable contributions to a retirement plan, but not so much that you’re depriving yourself during your working years. I also believe that everyone needs an emergency fund with three to six months of living expenses tucked away.
But I don’t believe that all Americans should aim for a net worth of $1 million, or another pre-set figure. Rather, I believe that it’s on all of us to decide what we want out of life; calculate what that will cost; and arrange our finances so that we’re spending appropriately, saving wisely, and resting easy at night.