How Much Money Do Americans Need To Be Comfortable?

The average American says they

need

to earn $233,000 a year to be financially

comfortable

. But in 2021, American workers earned on average just $75,203 a year. Americans are looking at how

much

money

they would like to have to be financially secure, and that ends up being basically three times the average income in this country. And to be essentially rich or really successful, the magnitude is higher than that. 72% of Americans said they were not financially secure given their current finances. And more than a quarter of Americans said they will probably never be financially secure. According to the figures, their debt is lower and their savings are higher after the pandemic, but they are more anxious about what will happen next, if they will have job stability, if they will be able to have a secure life.

Retirement. With more than half of Americans living paycheck to paycheck, many are not achieving some of their modest financial goals. In reality, there are millions of people struggling. It's not something people want to talk about. But if you're in a place where your financial security seems very precarious, you're not alone and it's not your fault. So how did it become so difficult to be financially secure in America, and what can you do about it? Let's do a little budget. Americans working full time earned an average monthly income of about $4,400 during the second quarter of 2023. The average worker takes home 75.2% of gross pay after taxes and benefits, reducing take-home pay at around $3,308.

And that's simply not enough to cover the cost of living in America today. The cost of health care has skyrocketed. The cost of attending college has skyrocketed. The cost of purchasing a home has skyrocketed. But nowhere has anyone said that wage growth has increased by 15%, right? Take a look at some of the most essential expenses for Americans. The median monthly rent in the US is $2,029 as of June 2023. That amount already represents more than 46% of Americans' median pre-tax income. But most US agencies classify spending more than 30% of gross monthly income on rent as a rental burden. Meanwhile, the median mortgage payment for a 2,400-square-foot home was $1,957 a month.

However, a general rule of thumb is to spend 28% or less of your pre-tax income on mortgage payments. For the median gross monthly income, that translates to just $1,232. As we talk to households and to consumers in the real world, especially those under 40, housing is the big issue. You know, rent, rent, rent, mortgage, mortgage, mortgage. The biggest concern is that people won't be able to make the next payment. Inflation is really hurting people who have stability in their housing. And I think sometimes people underestimate that if you have uncertainty in your home, that creates uncertainty everywhere. Housing is also the reason cities have become harder to afford.

Americans said it would take more than $1 million in net worth to be financially

comfortable

in places like San Francisco, New York and Southern California. That's why we've seen some migration or mobility around the country where some people say, 'I live in a high-cost state like California or New York.' “We really want to pack our bags and go to an area that is less expensive.” And one of the ironies of this is that places that were cheaper before are now getting more expensive. Americans spend an average of $690.75 on food each month, according to the latest data from the Bureau of Labor Statistics.

That amount is significantly higher than any of the grocery bills estimated by the USDA, including more generous and liberal meal plans. Add in out-of-pocket health expenses that cost the average American $96.42 each month, and you get a total expense of $2,816.17 for renters and $2,744.17 for homeowners. That amount already represents 85% of the median take-home pay for the average American renter and more than 82% for the average homeowner. This excludes other essential expenses such as transportation, childcare, and debt payments. Many Americans are really struggling simply with the rising costs of living, food, and housing. Utility bills have increased. Car insurance has gone up.

Home insurance has gone up. And how can they pay for them but also meet other goals that they also have? Budget experts advise Americans to spend only 50% of their net income on essentials, 30% on necessities, and 20% on savings or paying down debt. We see that allocation changing significantly when people spend 75% of their net income on necessities alone, leaving very little for necessities and very little to save for their financial future. So depending on where you live and of course your income, many Americans really can't meet that target allocation. Much of managing your financial life in America today is like drinking from a fire hose.

Many households are not able to come forward and impose a framework of their own design on their finances. Many are still in this reactionary space where they are simply trying to figure out how to make ends meet. The Federal Reserve has implemented 11 interest rate increases to combat inflation since March 2022, but more than a third of Americans said the interest rate hike was impeding their financial comfort. Higher interest rates can really hinder the affordability of many activities or financial decisions people want to make, and buying a home is at the top of that list. Look at the person who was going to buy a house that cost, say, $375,000 two years ago.

Her monthly payment would have been less than $2,000. Now it costs about $3,400. And it's the same house, right? The only thing that has changed is the interest rate. Buying a car is more expensive. It is more expensive to carry a balance on a credit card with the new credit card offers, with even the best rated people 20.5% and other people paying close to 30%. The cost of capital is rising very rapidly and a lot of the kinds of footholds that we saw for low-income households were because they had access to credit and mortgage loans and other things in a relatively flat economy where they still had a good market. of work.

The ability to access credit, for both small businesses and households, is becoming

much

more difficult as the financial system becomes more risk-averse in that space. Credit is essential because Americans do not have savings to cover large expenses. More than 40% of Americans attributed financial insecurity to insufficient retirement funds or emergency savings. Many people, simply to feel subjectively and financially better,

need

a certain amount of savings. Many financial planners will say three months of your income. For many people, this is so overwhelming that they can't even begin to think about it. More than half of Americans today said they did not have at least three months of emergency expenses saved, including 22% who said they did not have any emergency savings.

Unemployment doesn't have to really throw someone off balance with their personal finances if they're among the many Americans who say they can't afford a $1,000 emergency expense and pay it out of their savings. The reality is that if expenses are routinely higher than your income, you won't be able to save significant amounts. There are many homes that make the verb of saving. You see

money

coming into your account all the time. It just doesn't stop there because they routinely get hit with the need to take that little bit of money and use it for some kind of income shock or unexpected expense or even expected expense. 36% of Americans said they had more credit card debt than emergency savings.

According to Experian, the average American has a debt balance of $96,371, which includes various credit products such as credit cards, auto loans, and mortgages. More than a quarter of Americans said debt was keeping them from being financially secure. Debt is a way to channel some of our financial resources, and that can be a very effective tool. Many of us are fans of credit cards that have rewards, for example. But if you don't pay off the principal or debt within the billing cycle, that's when those double-digit percentage interest rates arrive and that can affect the other aspects of your personal finances.

How do we address this properly so that people can't be in the cycle of solely focusing on paying off debt and necessities, but can even think about transitioning into that other 20% and creating emergency savings that create financial stability or even saving for retirement, which is the goal of creating future financial stability during retirement. The fact that many Americans live in financial insecurity poses a great risk to the economy as a whole. There's a reason we measure and monitor things like confidence or consumer sentiment very closely, because what populates those data points are everyday measures like inflation and labor market strength.

I think Covid really showed us that households, when they don't have a level of stability and security, are actually the primary basis for whether the economy can be strong or not because we rely heavily on consumer spending in this country. . Public policies can greatly improve Americans' chances of achieving financial security. So, for example, Social Security is the foundation of most people's financial security during retirement. It's not the only source of income for your retirement, but it keeps many seniors out of poverty. And we know that Social Security needs some reforms to maintain its same level of benefits.

And then also anything we can do to make sure that employers are offering any kind of retirement savings opportunities, emergency savings opportunities at work, offering employees the ability to enroll in benefits, whether it's health insurance or life insurance or disability insurance. You know, employers are a key part of this too. And public policy plays an important role in terms of what employers can offer and at what price they can afford it. Also important is the willingness of households to work for financial security. Ultimately, the answer here is that solutions must be achieved at both the macro level and the household level.

And so, at some level, we should all try to own our own financial success by managing our money as best we can in a variety of areas like emergency savings and retirement. Financial advisors say the first step is to have a clear goal. What do you personally want to achieve? What do you want to achieve at work? When do you want to retire? What do you want to do for others? And write it down. But the key to success comes down to budgeting. Everyone should make a budget. What we are saying is that it is not what you earn, but what you keep.

And then think and have some transparency about where your money is going? And then make sure the budget you have aligns with the goals you wrote down. If you say you want to retire early, are you saving more to retire early? If you want your kids to go to college, if you want to be debt-free, are you paying more on your student loans? Are you paying more on your credit cards so you can be debt-free? Make sure your budget aligns with your goals. In reality, there are millions of people struggling. It's not something people want to talk about.

But if you're in a place where your financial security seems very precarious, you're not alone and it's not your fault. Many people who have really high incomes and a lot of savings still feel financial anxiety. So don't feel like this is your fault or that it has anything to do with the fact that your income isn't enough. You know, we all have to deal with this in different ways and the most important thing you can do is just recognize it and deal with it and not try to avoid it.