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If you’re feeling the pinch of monthly bills and worry about making ends meet, you’re not alone. According to a recent Bankrate survey, 72% of Americans feel financially insecure.
But how much would it take to feel comfortable? Or even rich? The same survey found Americans would need to earn an average of $233,000 a year to feel financially secure and $483,000 annually to feel rich.
The average full-time, year-round worker earning the median income of $75,203 would need to triple their salary to feel comfortable, let alone rich.
This isn’t that surprising, as the surging price of goods and services has made living costs more expensive. Most Americans who said they were financially insecure (63%) said high inflation kept them from feeling comfortable.
But it’s important to remember that being rich isn’t just about how much you make. It’s about where you live, how much you spend, and where you put your money to work.
What does it mean to be rich?
Being rich looks a lot different depending on where you live and your financial needs.
A single person earning $250,000 annually in a cheaper housing market like Scranton, Pennsylvania, will probably feel richer than a family of four earning $250,000 in San Francisco.
But in many ways, the definition of wealth and financial freedom “is a deeply personal one,” says Elliot J. Pepper, certified financial planner and director of tax services at Northbrook Financial.
Instead of comparing yourself to others, consider your own goals, values, and circumstances.
“Financial freedom is not solely about accumulating wealth but having the means to live life on your own terms,” Pepper says. “It’s about finding a balance between enjoying the present while planning for a secure future.”
Does how much you earn change how much you need to feel rich?
If you’re making more money now, you’ll probably have increased expectations about how much money you’ll need to feel rich.
Bankrate’s survey shows someone earning $100,000 or more per year today would need to earn an average of $600,000 to feel rich. One in four people in the six-figure club said they would need to make $1 million or more to feel rich.
Why is this? Earning more tends to correlate with spending more.
Most respondents said if they got a pay raise, they would increase spending on travel, home upgrades, charitable contributions, and dining out.
This is a familiar problem known as lifestyle inflation. Engaging in unsustainable spending habits and focusing away from long-term financial goals can negatively impact your financial health.
“The increase in spending often happens slowly and without a person being consciously aware of it,” Pepper says. “A big part of lifestyle inflation comes from purchases that both themselves represent a higher cost compared to a previous purchase, but also incur higher ongoing expenses for maintenance [such as] new homes and cars.”
6 ways to get rich
Of course, you could win the lottery or become a pro athlete are ways to get there. Luckily, practical tips to get on the pathway to building wealth.
1. Pay down your debt (but don’t forget to save!)
Credit cards, car loans, student loans, mortgages – Americans carry a lot of debt. Debt can balloon into a larger financial burden, reducing disposable income you could put towards other things.
If you have debt, make a plan to pay it off, focusing on the most expensive – the one with the highest interest rate – first.
Make sure you’re also saving money to have a cushion if an unexpected expense pops up. This way, if your air conditioner breaks or you need to call a plumber about a leak in your bathroom, you’ll be able to pay in cash – instead of racking up more debt.
2. Set specific goals
You can’t write “be wealthy” on your to-do list and expect the cash to start flowing. Achieving a sense of financial freedom often relies on a regular ability to spend less and save more.
If you have a larger goal, like buying a home, consider breaking it down into smaller, more manageable steps, says Pepper. Long-term goals take time, but adding shorter milestones can keep you motivated.
It’s also important to step back and look at the big picture.
“Just like you go to the doctor and dentist for regular check-ups, make sure that you have a financial check-up at least annually to review your goals, appreciate what you have already accomplished, and make any edits or adjustments to your plan,” Pepper says.
3. Avoid unnecessary spending
Every dollar counts. It’s essential to make a plan to eliminate overspending on products and services you don’t need.
Review your spending habits to determine which expenses could be reduced or eliminated. You may also want to consider creating boundaries around spending.
For example, it’s okay to take a vacation – you should take time to relax – but create guardrails to ensure you’re not over budget. Setting a maximum limit that’s reasonable to you will save you money and prevent you from going into debt or dipping into savings.
4. Invest
Saving money is important for financial security, while investing is the key to building wealth. Plus, the growth potential of investing is often much higher than the returns from savings accounts.
Investing does come with risk, but the potential returns can help you achieve your long-term financial goals faster. To start, you should explore a wide range of investment opportunities to find what fits in with your goals. Part of that means understanding how much risk you can tolerate compared to the reward of higher earning potential.
5. Boost your income.
As you work to build your wealth, think about ways to increase the amount of money coming into your bank account.
This could be earning passive income like renting out an extra room in your house or owning dividend stocks.
You’ll also want to consider pursuing bigger professional opportunities. That may mean negotiating a pay raise or a promotion at your current job or recognizing when it’s time to find a new job with better earning potential.
6. Make a plan for those income increases
Remember that pesky lifestyle inflation? If you’re expecting a windfall, it’s important to plan and get ahead of it before your spending ticks up.
Pepper uses the barbell approach with clients to help them avoid lifestyle creep.
“Under this approach, as people’s income keeps rising and they already have a solid foundation and savings plan for the future, they can simply split any incremental increases in wealth between additional investing and additional spending,” Pepper says. “This will keep lifestyle inflation in check since it incorporates a ‘savings inflation’ to counter the increased spending.”
The bottom line
The concept of “being rich” might bring up dreams of owning multiple homes in multiple states and flying on a private jet.
But being rich can also mean being debt-free and stress-free, with the ability to accomplish your financial goals. It’s important to be realistic about your needs and expectations as you plan to achieve financial freedom.
You don’t have to catapult yourself into the 1% percent to enjoy life. You need to focus on spending less, saving more, and putting your money to work to grow it over time.
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