Financial Comfort

The other day Aaron Morrissey posted about a report that calculates a single person in DC needs to earn $32,000 in income to be financial secure. The reaction to this statistic has been, not surprisingly, debatable.

(from Andres Rueda on Flickr)

These types of discussions are primarily discussed in terms of income, which isn't the right way to think about it. As I've written, debt and net-worth is what really matters.

Consider three hypothetical twenty-somethings in DC. The all work the same job, they have the same modest income, they live in the same neighborhood and pay the same rent. The first person has no debt. The second person has $10,000 in debt. The third person has $100,000 in debt. There is a significant difference in the financial situations of these three people, even though by the most commonly reported metrics, they're doing equally well.

Beyond that, there's the perception that people spend within their means. So someone who drives a fancy car and eats at restaurants 5 nights per week and wears nice suits must earn more income than someone who takes the bus eats at home and prefers a casual look. Without a doubt, appearance is important to a lot of people in DC, but it's not a good way to understand someone. In a lot of cases, it may be nothing more than a disguise.

1 comments:

    On October 14, 2010 Peter Smith said...

    i disagree with you on both counts.

    first, net worth may be linked to 'financial comfort' in some way, but if you don't have day-to-day and month-to-month financial comfort, then it doesn't matter what your net worth is -- you need to change something.

    the obvious example is medical doctors and lawyers and other highly-trained professionals. their net worth, for a long time, is less than $0, but they're living large almost immediately out of school/training.

    as for debt, i can see pointing out that having a debt load, either from school or whatever, can impact your 'financial comfort', but it doesn't discount or lessen in any way the basic figures pointed out in this income/expenses data. there are myriad other factors we could introduce into the data, but the study uses a simple, standard measure, so it's meaningful. if you owe $500/mo in debt, then add it in - no problem.

    also, debts don't have to be paid, at least in the short term, and maybe not ever. this is huge for 'financial comfort'. ask how many kids are regularly late or just not paying their student loans -- i bet it's near 20%, now, if not higher. this helps them stay above water in the short term. their credit will suffer, but it's no biggie they'll be able to stay comfortable financially now and later, when they make more money, pay it off much easier then.

    as for people who spend within their means or not, it's a totally separate question, and there are many reasons for it.