What is financial success?
It seems that everyone has financial success as a goal – either specifically or in the back of their mind. But what does financial success really look like? In reality, it may look very different from one person to the next. As a fee-only financial advisor and money coach, I’ve noticed there seem to be three main groupings of how people look at and measure financial success.
- Many people, when asked, respond that financial success to them is being able to acquire that nice big expensive house, or a certain fancy sports car, or perhaps being able to take upscale vacations to exotic locations.
- There are also a lot of people who would consider financial success to be out of debt, a comfortable savings buffer (emergency fund), and positive cash flow each month (never short on paying expenses).
- Others would define financial success as having the resources to pay cash for their children’s education, or to retire with dignity and an enjoyable lifestyle from their investments, or to be able to give generously to causes that they’re passionate about.
“The world” – certainly based on the level of marketing and advertising and the consistent messaging that we’re bombarded with – seems to define success like the #1 description above: The more stuff you have and the fancier it is, the more financially successful you are. It’s pretty easy to see someone with really nice things and think to ourselves, wow, they must be successful!
The problem with the world’s definition: group 1
What many people don’t think about though is that “stuff” really isn’t a good measure of financial success. Take Warren Buffett as an example. He lives in a modest home that he purchased in 1958, and he doesn’t own a yacht or a fancy sports car. He lives very frugally yet most people would say that he is financially successful. On the other end of the spectrum you can look at Kanye West, who earns about $1 million per concert – bringing in about $72 million in the past three years – but has managed to spend all of his money on various ventures and lots of fancy “stuff”. He’s spent so much money that even though he’s an incredibly high earner, he has managed to get himself into $53 million dollars of debt!
[You might also be interested in the article How Do Wealthy People Really Live? (will open in a new window so you can keep reading here first.)]
How about group #2: success and progress
The description given to group 2 above is – thankfully – fairly popular with people who’ve taken the time to actually think about their situation and their future. What that group is focusing on, whether they understand it or not, is building their net worth.
Net Worth is the total of all of your assets (everything you own, including savings and investments) minus your liabilities (everything you owe to someone else).
Because of rampant credit card balance growth over the years, many Americans, unfortunately, have a negative net worth when they run the numbers. Yes, they owe more than the value of what they own. This often happens from financing consumer goods that drop in value. Let’s take a new car as a quick example. A new car loses about 10% of its value as soon as it is driven off the lot – and another 15-25% each year. So someone who buys a new car with minimal money down, and finances the purchase, has immediately taken a hit to their net worth. Rather than success and progress, they’ve lost ground. I’ve done it too, so I’m not judging – just stating the facts.
Back to group 2 above: They consider themselves to be successful (and I would too) as they pay off their debts and build their savings and investments – steps that directly increase their net worth (fewer negatives in the equation). They also want to get ahead of the bills and payments so they strive to have more income arriving than the number of bills they need to pay. The cool thing about having positive cash flow every month is that the “excess” is going somewhere; if it isn’t going to bills and expenses, then it is getting saved or invested. That increases the positive side of the net worth equation.
Then group 3: success and results of the progress
The third group of people consider financial success as having the resources to retire well and cover things they are passionate about (like children’s education and donating to worthy causes) with cash and not needing to take on any debt. Having a nice level of net worth gives a tremendous amount of flexibility and options. With a nice amount of money available – more than “needed”, so positive cash flow build up – you have the flexibility to take some of those resources and do something exciting with it. In an ideal situation, your net worth level will be invested in such a way that it both continues to grow and also generates some income (interest and dividends) for you to spend.
In fact, that’s what I would consider true financial freedom and the ultimate level of financial success: Having built up a nest egg (net worth) large enough, and invested properly, so that you can support your lifestyle without having to draw down the balance. It’s ideal to be able to live a dignified life in retirement, plus maybe travel or do other things that excite you, and also be on target to leave a nice inheritance to your children, grandchildren, or other family members.
By the way, when doing financial planning, here is what matters even more than your income level. Understanding this major point will help clarify your goals and keep your success on track.
Targeting financial success
With definitional thoughts out of the way, here are points to consider when targeting your personal level of financial success.
Know your net worth. As a fee-only financial advisor and money coach, one of the first things I encourage clients to do is a personal financial statement – which is just a fancy term for calculating net worth. Before you can develop a plan with goals and milestones, you need to know the base from which you are starting. We recommend using a free online tool, like Mint, to track your net worth and gauge whether you are on track to meet your goals or not.
Create cash flow margin. If you are living paycheck-to-paycheck like about 80% of Americans, you don’t have any margin in your monthly cash flow. Without any margin, it is extremely hard to build wealth and increase your net worth. But once you have margin you can direct money into savings or investment accounts so that it can grow and work for you.
If you are struggling to generate margin right now, you really should lock into a strict monthly budget so you can prioritize spending and knock out things that just aren’t providing that much enjoyment in your life.
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Define your goals. A popular goal for retirees is to have 25x their required income built up in their investments. With 25x the required annual income you can follow the 4% rule to have a very high chance of successfully living off your money and not outliving it. Your goals might not need to be so lofty… especially if you consider your expected social security income and if you might actually scale-back lifestyle a bit when retired. Regardless of the specific goal, you do need to set goals.
Create milestones. Once you know your starting point, and your ideal endpoint, you should be able to create milestones. These milestones are merely checkpoints over time where you have certain mini-goals that you can check your progress against. Certainly, I’d recommend annual checks but depending on your level of intensity and progress, you might want to have more frequent checkpoints – perhaps quarterly or even monthly. Besides being able to gauge progress, these milestones also act as motivation points for you. If you are off-track, figure out why and adjust the planning as needed. If you are on-track, celebrate a little and let that success push you further toward the excitement of achieving your goals.
Go make it happen
A lot of people have never taken the time to think about what financial success means to them, or even what the most important things are to them. Congratulations to you for thinking about this topic and being interested in working on your financial fitness level. There is a lot of great information on our site and many others, which can help move you toward your goal, but if you want someone to walk with you to teach, encourage, and help with accountability, contact us to talk about how we can help.