What is Financial Success?
- Financial PlanningHow do YOU define it?
My husband recently came across an article about a US survey regarding financial success. The results showed that few people equate being a millionaire with being financially successful (sorry, Martin Fry). In fact, few people define their financial success in terms of numbers or material possessions at all. Most people see success as a state of mind: feeling comfortable, prepared, and free from worry.
What’s your definition of financial success? Is it one or more of the above? Something else? My husband’s definition of financial success is paying off our house, which will result in a feeling of security. Mine is probably a combination of all three of the top responses: feeling comfortable, worry-free, and prepared. One of my friends said financial success is "the ability to do what I want without having concern for my future self running out of resources." Another said, "My definition would be financial security such that I don't worry about aging, illness, and retirement."
The point is that we all have different goals and definitions of success, and for most of us, the simple fact of having more money or stuff isn’t a great indicator. If I won $35 million in the lottery and blew it in the first two years on troll dolls and fancy cars, I wouldn’t think of myself as a financial success. There’s a Part Two to this story, and it has to do with how we manage our financial resources. Am I a good steward of my money? What is it I’m trying to achieve, and do my actions support that? Financial success is a combination of clear goals and good money management.
I’ve said this a number of times in my blogs, but I never had a client come in and tell me their goal was to stockpile money. They always had other ends in mind: putting the kids through school, traveling, buying a home, or quitting their stressful job. They always had the resulting feelings in mind: joy, excitement, peace, confidence, or ease. They wanted to live like the people in the survey: achieving their goals and feeling comfortable and prepared for the future.
That said, how do you get there? Well, since it’s about your state of mind rather than exact numbers, feeling financially secure is within your control. (Note: For those who struggle with finances and are not in a position to feel comfortable, I see you). Here are some things you can do to work toward financial success:
1. Know your why: The first, best thing to do is to know what you want and write it down. Do you want to stop working for money when you’re 50? Do you want to travel? Do you want to reduce your cost of living and find a less stressful job? Get very specific: “I want to take three two-week trips and three long weekend trips every year of my retirement, until I’m 78.” Keep your list front and center and check in on it at regular intervals. Is this still what you want?
2. Set goals around your why: Figure out how much it costs to enable your why, and then set goals to get there. Do you need a higher-paying job? Do you need to move? How much do you need to set aside each month to support yourself during retirement?
3. Build a spending plan and track how you do over time: Use an Excel spreadsheet, the envelope method, or any app you like. Just be sure you know how much you’re spending and on what, and have a target for how much you’d like to spend in the future. Then work toward your spending goals in each category.
4. Build a solid credit history: If you ever need to borrow money, you’ll want a good credit score so you can get lower interest rates and save yourself some money.
5. Earn more: One shortcut to financial success is to make more and then not spend more. With each month's swag, you can enable other financial goals and get to your definition of success sooner. Know what you’re worth and ask for it, or change jobs to get it.
6. Save: Almost everyone needs an emergency fund to pay for an unexpected flat tire, new dishwasher, or period of unemployment. The amount you need will depend on how much you spend on essentials every month, but 3 – 6 months’ worth of living expenses is a good start.
7. Invest for retirement: If one of your goals is to stop working for money, you’ll need long-term investments to fund at least some of that retirement period.
8. Track your net worth: Your net worth is just your assets minus any debts. There are plenty of calculators online with instructions on what to include, but the idea is to track net worth over time and make sure it’s increasing. When you’re saving money instead of spending it, your net worth is going up. And as your ratio of assets to liabilities gets higher, you’re probably getting closer to financial success.
9. Pay off debt: This follows from what I said about net worth. Reducing your debt is another way to grow your net worth and get closer to financial success. It also frees up cash for other purposes, like saving and investing. And for a lot of people, it reduces stress.
10. Insurance: To ensure your success, you’ll need to protect yourself from risks that could derail your plan. If you get injured and can’t work, if you die early, if you get sick and it costs a lot of money to get well, if you get sued…you will probably need insurance to help you get through it.
11. Get support: Hire solid advisors, in the form of a Financial Life Planner, a Financial Coach, a tax professional, or whomever you need. Spend time with people who have goals similar to yours, so it’s easy to resist the 40-foot boat and three-month holiday in the Maldives you can’t (or don’t want to) afford.
12. Have a comprehensive financial plan: I recommend that you pay for help if you can. You just don’t know what you don’t know, and if you make a mistake, your plan might be at risk. If you prefer to do it yourself, have at it, but please do it. You can get some initial direction here and here. Please also make sure you review your plan at least once a year so it grows and changes with you.
I hope this post has sparked your thinking about what success means to you, along with some ideas for actions to get you there. I encourage everyone to spend some time to thoroughly consider how they define success and make sure the train is headed in the right direction. The sooner the better; don’t wait until your train has sailed. And I hope you love mixed metaphors as much as I do!
