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Schwab's Modern Wealth Index and the Importance of Planning

What does it mean to be wealthy? What does it mean to plan for, and potentially achieve, financial independence and comfort? The answers may surprise you.

Schwab recently announced its 2018 Modern Wealth Index, surveying 1,000 Americans ages 21 to 75, across various wealth levels and regions, with help from the Schwab Center for Financial Research (SCFR). Here are some of the things we found:

  • Three in five Americans live paycheck to paycheck, and only one in four have a written financial plan. But people with a written financial plan were more likely to save, feel financially stable and effectively manage debt. For instance, planners were more likely to pay bills and still save money each month (75%) compared with non-planners (33%). Planners were much less likely to live paycheck to paycheck compared with non-planners (38% vs. 68%).
  • For most Americans, wealth is not defined as money. Regarding their personal definition of wealth, two of the top three answers weren’t about money: “living stress-free/peace of mind” (28%), “being able to afford anything I want” (18%) and “loving relationships with family and friends” (17%). Only 11% defined wealth as “having lots of money.”
  • Millennials outpace older generations in planning. Thirty-six percent of Millennials have specific savings goals, compared with 25% of Gen X and 17% of Baby Boomers. Nearly as many Millennials currently work with a financial advisor (22%) as Baby Boomers (25%); only 16% of Gen X were working with an advisor.  

At Schwab, we believe in the power of investing to transform people’s lives. That’s why Schwab created our 7 Investing Principles, to provide food for thought and a guide to creating a thoughtful plan. In Schwab’s 2018 Modern Wealth Index, we explored four topics from the Investing Principles:

  • Goal setting and financial planning
  • Saving and investing
  • Staying on track
  • Confidence in reaching financial goals

Here are some of the things we learned: 

1. People with a written plan report better outcomes.

Do written plans and behaviors that support “planning” help? Yes. The MWI scored respondents from zero to 100 in how they answered questions. “Planners” with written plans scored an average of 68, while non-planners report an average score of 44. Here are other takeaways:

  • Planners tend to have an emergency fund to cover unplanned expenses (65% vs. 24%).
  • Planners are more likely to feel financial stable (62% vs. 32%).
  • Planners are more likely to never carry a credit card balance and to make loan payments on time or have no debt (42% vs 26%).

2. Planners are more likely to stay engaged with their investments.

In general, planners are more likely to have considered their risk tolerance when investing (82% vs. 55% of non-planners) and to be aware of fees and investment costs (78% vs. 44%). Planners are also more likely to regularly rebalance their portfolios than non-planners (72% vs. 31%) and to have a diversified portfolio (22% vs. 8%). Also, planners are more likely to feel “very confident” about reaching financial goals (54% vs 17%).

3. Most people agree—generally—on what it means to be “wealthy.”

When asked a dollar amount, respondents said they believed it took $1.4 million, on average, to be considered “financially comfortable,” and $2.4 million to be “wealthy”—of course, the amount of money required to live in “comfort” or “wealth” may vary depending on where you live and your lifestyle.

Just under half of the respondents (45%) said they believed they’d be “wealthy” at some point in their lifetime, and about an equal amount (45%) said they wouldn’t. About 9% consider themselves to be “already there.”

4. Many believe they don’t have enough money to plan.

For some people, planning seems about as pleasant as visiting the dentist. It sounds intrusive—or worse, painful. The most common reason people say why they don’t have a plan: They believe they “don’t have enough money” (45%). One-fifth (20%) answered that having a financial plan “never occurred to them” and another 20% said they didn’t know how to make one.

5. Millennials are more focused on saving, investing and financial planning than older generations.

Bucking popular perception, Millennials were significantly more likely to have a written plan (31%) than Gen X (20%) and Baby Boomers (22%), and 74% of Millennials regularly rebalance their investment portfolios (compared with 66% of Gen X and 64% of Boomers). Millennials say they may not always be able to put every part of the plan into action—they’re focused, for example, on starting a career or paying student loans. But they are planning, and that’s a step many Gen X and Baby Boomers may be hesitant—but would be well-served—to think more about now.

Tips for making a written financial plan

What’s one key? The plan is formal. It’s written. It took some time and thought. It goes beyond investment choices and to the issues that matter—how you’re paying bills and managing expenses, if you’re “paying yourself first” to save for goals important to you, if you’re including debt management in your thinking, and if you have a disciplined, written investment plan

Getting started is pretty easy: Just write down your goals. We suggest keeping the list short, so it won’t feel overwhelming—think about the things that are the most important to you and your family. Saving for retirement, paying for college or buying a home are examples of goals that many people list, but you may have other priorities, such as a dream vacation, paying down debt or building an “emergency” fund.

Once you’ve identified your goals, you can sort them by time horizon. A technique known as “bucketing” can help you sort out what you’ll need in a few months, in a few years or in 10 years or more.

Once you’ve identified your buckets, you can start investing. Even modest contributions, when made regularly, can pay off substantially over time. Take the time to think about how you define “wealth” and “financially comfortable,” and to write down your personal goals and your plan to achieve them.

Often this involves an advisor—someone to help push on goals, explore options, document, write down, and help as a coach to stay the course. Roughly half (51%) of the MWI respondents said their written plans were developed with the help of a professional. If you need guidance or advice in setting or prioritizing your goals, or starting to invest, a financial advisor or Schwab Financial Consultant can help.

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Important Disclosures

The information provided here is for general informational purposes only and should not be considered an individualized recommendation or personalized investment advice. The investment strategies mentioned here may not be suitable for everyone. Each investor needs to review an investment strategy for his or her own particular situation before making any investment decision.

All expressions of opinion are subject to change without notice in reaction to shifting market conditions. Data contained herein from third-party providers is obtained from what are considered reliable sources. However, its accuracy, completeness or reliability cannot be guaranteed.

Examples provided are for illustrative purposes only and not intended to be reflective of results you can expect to achieve.

Diversification and rebalancing strategies do not ensure a profit and do not protect against losses in declining markets.

The Modern Wealth Index, developed in partnership with Koski Research and the Schwab Center for Financial Research, is based on Schwab’s Investing Principles and composed of over 50 financial behaviors and attitudes. Each behavior or attitude is assigned a varying amount of points depending on its importance, out of a total of 100 possible points. The online survey was conducted by Koski Research from January 12 to January 19, 2018, among 1,000 Americans aged 21 to 75. Quotas were set so that the sample is as demographically representative as possible. The margin of error for the total survey sample is three percentage points.

Koski Research is not affiliated with the Charles Schwab Corporation or its affiliates.

The Schwab Center for Financial Research is a division of Charles Schwab & Co., Inc.

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