Sometimes we can get enamored with where we want to be financially rather than optimize our situation from where we stand. As a 25-year veteran in the financial planning industry, I know that may sound strange coming from me. I help people dream and plan their financial futures. Am I suggesting you should not aspire to earn and have more? I would say there is nothing wrong with creating and planning toward your goals, but the fact is that what you aspire to may not be what you think it should be.
I was recently asked to discuss a SmartAsset study on the topic of how much you need to earn to live comfortably. The study looked at cities and used the framework of a 50-30-20 budget to help determine if the family could cover their needs with 50% of their income. With only 50% of the budget dedicated to necessities and inflation on the rise, it placed the income number for a family of four over $250,000 in several cities. These numbers seemed astronomical to the interviewer. He pointed out that “only 18% of individual Americans make more than $100,000 a year, according to 2023 data from careers website Zippia.”
I understood the shock. When I started working full-time in 1999, I made less than $30,000 a year. I saw the mythical target of earning 6 figures as the “financial Promised Land” in those days. I thought that surely, I would feel rich once I got there.
What I didn’t anticipate was the fact that when I did reach that milestone, I had my own family of four with a child in private pre-school and was paying for my master’s degree out-of-pocket. While I was glad to have reached the six-figure mark, I had a lifestyle that consumed a good bit of it. I learned that I needed to shift my focus from simply how I earn to whether I am making optimal decisions with the money I have earned.
Income is not the goal. Building wealth is.
The core of any financial planning is cash flow. Generally, the more income you have to work with, the better. More important, however, is the question of how much of the money you’re earning will you get to keep?
Whether you are at your optimal earnings level or a little less, are you living below your means? Are you saving money for your retirement? Rather than putting your income as the primary concern, focus on your net worth to keep score.
Focus on accomplishments.
I have had the privilege to see many different financial situations up close and personal. Some families manage to accomplish major milestones with the same or less income. Some important milestones include paying off high interest rate debt, building an emergency fund, maxing out your 401(k), paying off student loans and even paying off your home. I have seen very high earners struggle to accomplish one of these goals and people who never earned six figures knock them out of the park.
Think big picture.
The Smart Asset study focused on the fact that higher earnings were required in certain cities. It pays to be careful about making huge life changes like moving for that higher paying job. Be sure to analyze the cost of living before making the leap. The same thing applies when it relates to benefits like health care. I have seen people lose money on a job change because they did not properly value the benefits of the previous job.
This is by no means a suggestion to not look to raise your earnings. You should certainly position yourself for raises and promotions. I am simply stating income is not everything. Even if a study states you need a certain amount of income to live comfortably, it doesn’t mean you cannot succeed.
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