How_to_determine_financial_satisfaction
00:00:00.000 | Hello everybody, it's Sam from Financial Samurai and in this episode I want to talk about happiness
00:00:05.360 | and I want to debate happiness and I want to come up with a ratio that could tell you whether you
00:00:11.200 | should be happy or not and how much wealth you really do need to be happy. So every so often
00:00:17.280 | a new idea hits me like a charging baby rhino for its next meal. I then stew on the idea for a while
00:00:24.240 | to make sure it's logical before publishing my thoughts. What if we could measure the financial
00:00:30.400 | satisfaction of various city residents? What if we could also identify how big of a minimum net
00:00:36.880 | worth is needed to feel truly wealthy? And what if we could measure our current greed levels? Well,
00:00:44.480 | I figured it out. I've come up with the Financial Samurai Wealth Reality Ratio and the ratio is
00:00:52.880 | simply the minimum net worth required to feel wealthy divided by the median home price of your
00:00:59.280 | city. The higher the wealth reality ratio, the less satisfied you are and vice versa. Given we can
00:01:07.040 | find the objective value of the denominator, which is the median home price of your city,
00:01:11.440 | we can discover our personal satisfaction or determine a net worth target that'll make us
00:01:17.120 | feel rich. So how did I come up with this brilliant, obviously logical ratio? Well,
00:01:22.960 | it first hit me when I saw Schwab's annual modern wealth survey. And every year they survey
00:01:29.680 | hundreds of residents from the 12 largest cities in America how much they think is required to feel
00:01:37.520 | wealthy. What is the minimum net worth required to feel wealthy? And to be clear,
00:01:42.240 | Schwab wasn't surveying people who were already wealthy, who already had the minimum net worth
00:01:47.920 | required to feel wealthy. They were surveying the average person who lives in that city.
00:01:52.800 | So I saw the survey results and the numbers range from a minimum of around 2.5 million to feel
00:02:00.240 | wealthy in Chicago to 5.1 million to feel wealthy in San Francisco. Now, intuitively, you would
00:02:08.160 | think, well, okay, it makes sense that you need more wealth, a bigger net worth in San Francisco
00:02:13.520 | to feel wealthy versus a bigger net worth in Chicago or Dallas or Houston. However,
00:02:19.040 | it's important to think about ratios and percentages, not so much absolute dollar
00:02:25.440 | amounts. When you're trying to figure out wealth or relative wealth, or outperformance or
00:02:30.320 | underperformance, too many people get hung up on the absolute dollar figures. And as a result,
00:02:35.680 | it just kind of short circuits their brain a little bit where they're like, wow, you need
00:02:39.600 | $300,000 to feel middle class in a big city or $5 million to feel wealthy in San Francisco. Oh my
00:02:47.200 | gosh, that's so ridiculous. But is it really ridiculous? It's not so much ridiculous if you
00:02:52.560 | look at the cost of living of an area. And so I came up with the median home price as a denominator,
00:03:00.080 | not so much to reflect what type of house will make you feel wealthy. But the median home price
00:03:06.000 | of your city reflects economic opportunity. And what do I mean by economic opportunity?
00:03:12.320 | Well, that's the ability to get paid and promoted. If there is greater economic opportunity,
00:03:17.920 | you are seeing companies hire more people, pay people better, you're seeing more companies
00:03:24.560 | come to your city. And as a result, the median home price will increase. Now if you have a low
00:03:31.520 | median home price city, you should think well, maybe the economic opportunity is not that great.
00:03:36.720 | For example, the median home price in Charleston, West Virginia is $151,330 in 2022, according to
00:03:44.880 | Zillow. Now the reason why it's so low is because the job market growth is not as strong as let's
00:03:51.120 | say in New York City, where the median home price is $767,000. So let's think about the ratio a
00:03:57.760 | little bit more. Again, the minimum net worth required to feel wealthy divided by the median
00:04:02.720 | home price of your city. Logically, the more money you aspire to have, the harder you will likely
00:04:09.040 | need to work, the more time you will likely need to spend, and the more risks you will likely have
00:04:15.440 | to take to achieve your net worth target. And if your target is too high, in other words, if you
00:04:21.840 | are super greedy or a little bit delusional or whatnot, there's a great chance that you might not
00:04:27.680 | ever get to that minimum net worth target. And what will happen as a result? You will feel
00:04:33.360 | frustrated, you will feel a little annoyed, miserable. And that's probably gonna bum you out,
00:04:38.720 | right? Conversely, if you can be satisfied with little more than a comfortable place to live,
00:04:44.560 | a t-shirt, you know, a burger a day from McDonald's, then you are more easily satisfied
00:04:50.080 | with your finances. So in order to get rich, you can work harder, take more risks to try to make
00:04:55.840 | more money and build your net worth, or you can want less. We know this. And the Buddha teaches
00:05:01.120 | us that desire is the cause of all suffering. I truly believe this. I wrote an article recently
00:05:08.240 | talking about my real estate FOMO because I found an amazing house on a huge lot. And I imagine my
00:05:14.960 | kids running around and having a great time. But I had just bought my current home a couple years
00:05:20.480 | ago in 2020. So I was thinking to myself, wow, I desire this. So now I'm thinking I have to go
00:05:26.960 | through, let's say, 30 days to 60 days of rigorous underwriting with the bank to try to get funding.
00:05:33.600 | I've got to figure out, you know, what new furniture to buy and what curtain shades to buy.
00:05:40.000 | And then I've got to go through and transfer money and sell this and move my family and pack my bags.
00:05:45.280 | I mean, that's a lot of work to because I desire something I really don't need.
00:05:50.080 | And I got to thinking, well, gosh, this is so sad, because I remember feeling this real estate FOMO
00:05:56.640 | in April 2020. When I was coming to my current house to visit during the private open house
00:06:01.920 | showings, I was imagining my kids running around, sitting on the deck, having a glass of wine,
00:06:07.360 | looking at the sunset. And I just thought, wow, this house would be so amazing to raise a family.
00:06:12.560 | And yet here I am, two years later, desiring some other house. And it's such a shame that I can't
00:06:20.320 | maintain satisfaction. I'm trying. And I think all of us try to some extent. But it's sad that
00:06:28.000 | we always are wanting a little bit more. So let's go back to the wealth reality ratio,
00:06:32.720 | which is the minimum net worth required to feel wealthy divided by the median home price.
00:06:37.920 | I've ranked the cities, the top 12 cities in a chart. And I've got the most financially satisfied
00:06:44.480 | cities with the lowest lowest wealth reality ratio to the least financially satisfied cities
00:06:51.920 | with the highest wealth reality ratio. And they are San Francisco, Seattle, Denver at three,
00:06:59.520 | Boston, LA, San Diego at five, New York City, Washington, DC, Phoenix at eight, Atlanta,
00:07:07.520 | Chicago, Dallas, Houston at 12. So San Francisco residents are the most financially satisfied.
00:07:15.520 | And Houston City residents are the least financially satisfied. And you could say
00:07:20.400 | happiest and least happy. But this is quite subjective. Now before residents of Phoenix,
00:07:27.040 | Atlanta, Chicago, Dallas and Houston get all apoplectic and angry about my chart.
00:07:32.880 | This is all relative, folks. We live in America, the best country in the world, with the most
00:07:40.160 | amount of freedom with the least corrupt government with the best infrastructure.
00:07:46.640 | And so if you are ranked the least happiest city or the least financially satisfied city in
00:07:52.480 | America, that's kind of like, you know, going to the buffet and maybe you know, the crab legs are
00:07:57.680 | missing and you can just eat roast beef, or, you know, scallops or whatever, you know, it's still
00:08:03.600 | pretty good, folks. So just don't get bent out of shape about the ranking so much. I just want you
00:08:08.880 | to think about how much wealth you really, really need to be happy. So here in San Francisco,
00:08:14.560 | with a median home price of $1.7 million, residents only need a net worth minimum of three times
00:08:22.640 | greater than the median home price or 5.1 million to feel wealthy. Now, if you're in Houston,
00:08:28.320 | the median home price is $267,000. And the survey respondents said they needed $2.6 million. That's
00:08:39.040 | 10 times greater 9.7 to be exact, to feel wealthy. Why do you need 10 times greater net worth than
00:08:47.280 | the median home price of your city to feel wealthy? Once you have a normal place to live,
00:08:52.800 | okay, let's say you go 4x the median to $1 million. You've got a fat pad in Houston, it's just
00:08:59.600 | massive, lots of land, pool, playground slides, tennis court, whatever it is, okay, maybe you have
00:09:05.760 | to spend more than a million. But do you really need 1.6 million extra to feel wealthy, even
00:09:12.480 | though you already have a baller pad that's four times more than the median home price?
00:09:17.120 | I don't know, it's subjective. I would say no. I would say you can get a great house for $600,000,
00:09:23.280 | $700,000 in Houston, and you have $2 million. That's more than enough. I would think 1 million,
00:09:29.600 | 1.5 million is more than enough. I think if your wealth reality ratio is between 2 and 5,
00:09:35.680 | you're financially satisfied with the opportunities you have. As your ratio reaches a 10,
00:09:41.840 | you become less and less satisfied because you're longing for way more than you need.
00:09:46.960 | The cost of living is low, so why do you need so much more to be wealthy? You don't. And despite
00:09:55.520 | my logic, I got some wonderful disagreements from readers. To no surprise, those who disagreed with
00:10:01.200 | my ratio don't hail from the happier cities or the more financially satisfied cities. And the
00:10:07.280 | one who did disagree with me and who does live in San Francisco wants to move out to afford a nicer
00:10:13.200 | home. He mentioned San Francisco felt like one big rat race to him, but I warned him that the rat race
00:10:19.120 | is probably more intense in cities whose residents feel they need 10x more than the median price
00:10:25.600 | of a home of their city than just 3x. But he believes the grass is greener on the other side,
00:10:31.920 | so I hope he does move and will one day report back whether relocating to save money was worth
00:10:37.520 | it. So the cool thing about the financial samurai wealth reality ratio is that it can help you
00:10:43.600 | understand yourself. Wherever you want to go, also, it can help you figure out how much net worth
00:10:50.400 | is required to feel wealthy. For example, one reader asked, "How would I use the wealth reality
00:10:56.880 | ratio to help ascertain how much wealth I need to feel wealthy in Honolulu, Hawaii?" Well,
00:11:03.040 | it's quite easy. So the median home price in Hawaii is about $890,000, very similar in Honolulu.
00:11:11.520 | All you would have to do is multiply by the multiple range of other comparable cities.
00:11:18.240 | So the range in my chart is 3x to 10x for the 12 largest cities in America. Therefore,
00:11:24.720 | Hawaiian residents would need between $2.67 million to $8.89 million to feel wealthy.
00:11:33.120 | However, given Hawaii is the best place on earth, anybody who's been there will agree.
00:11:37.920 | One could argue a multiple of three at the most works very well. Hawaii weather is amazing,
00:11:45.280 | the beaches and mountains are free. Overall, Hawaiian residents live longer and are less
00:11:50.240 | dressed and are more healthy. So you could say three is the max. So if three is the max multiple,
00:11:56.080 | you would take the median home price in Hawaii or Honolulu, if that's where you want to live,
00:12:01.840 | and you'd get $2.67 million to feel wealthy, right? But a wealth reality ratio of two,
00:12:07.920 | equaling $1.78 million, is probably plenty if you're living in paradise. The nicer the area
00:12:15.200 | the city you're living in, the less money you need to feel wealthy to feel happy. So this is
00:12:20.640 | one useful way to help anybody thinking about relocating somewhere, how much net worth is
00:12:26.240 | required to feel wealthy. Now you can use the financial samurai wealth reality ratio, determine
00:12:31.680 | your own financial satisfaction, right? Let's say I'm a little delusional and I think I need 50
00:12:37.920 | million to feel wealthy, even though I live in a $1 million house and spend less than $200,000 a
00:12:43.920 | year. My wealth reality ratio would equal 50. Now clearly I think that's way too high. I'm never
00:12:52.160 | likely going to be satisfied with my wealth because I'm probably never going to get to 50
00:12:56.320 | million when the median home price of my city is 1 million. So instead, I should probably shoot for
00:13:02.720 | a minimum net worth of between 6 to 10 million, because 6 to 10 million is equal to a wealth
00:13:10.080 | reality ratio of 6 to 10. And if I already have a minimum net worth of between 6 to 10 million,
00:13:16.640 | then I need to learn to be more appreciative of what I have. I think if you have a wealth reality
00:13:22.640 | ratio of between 1 to 3, you are extremely satisfied financially. Between 3.1 to 6 means
00:13:29.520 | you are satisfied financially, between 6.1 to 10 means you are slightly dissatisfied with your
00:13:35.280 | finances, between 10 to 20 means you are dissatisfied with your finances, and with a
00:13:41.360 | wealth reality ratio over 20, it means you are highly dissatisfied with your finances or you're
00:13:47.040 | delusional or it's a combination of both. And here's another interesting use of the wealth
00:13:52.720 | reality ratio. As an investor, you might identify a city such as Honolulu and say, "I love Honolulu.
00:14:00.240 | I require a low wealth reality ratio to be happy, but I want to maximize the returns on my capital.
00:14:07.440 | So what should I do? Maybe I should look at investing in the least financially satisfied
00:14:15.200 | cities." And those cities again are Houston, Dallas, Chicago, Atlanta, Phoenix, a little bit
00:14:22.720 | Washington DC, not so much, because these residents are desiring more wealth. They have the fire and
00:14:31.280 | the desire to hustle for 10x more wealth to feel happy. And so that might mean that they're going
00:14:38.800 | to work harder, be more innovative, more companies are going to come, and there's going to be better
00:14:44.720 | job growth and more wealth creation. It's kind of like being a hiring manager. You want to hire
00:14:49.920 | the hungriest person who's going to work the hardest to generate the most amount of profits
00:14:55.040 | and revenue for your company. You're not going to want to hire the one who's really easily satisfied
00:14:59.920 | and just shipping it in, not coming into the office, logging off exactly at 5pm or whatever
00:15:05.680 | it is. You want that hunger. So you want to invest in the least satisfied people because they're the
00:15:10.800 | hungriest to want to build more wealth. So something to think about folks. And the final point I want
00:15:16.480 | to make about this exercise is to encourage all of you to think in derivatives. Don't just look at,
00:15:22.640 | oh okay, those are the survey results of how much you need to feel wealthy, and you look at it in a
00:15:27.440 | vacuum. No, you want to look at it across various data points. This country is large with different
00:15:33.840 | levels of cost of living, and you want to think about how you can come to different conclusions
00:15:39.520 | based on the data you have. If you can practice looking at data and coming to different conclusions,
00:15:45.120 | you can also approach problems and find better solutions. This is the Financial Samurai Way and
00:15:52.480 | the Financial Samurai Mindset. I hope you enjoyed this episode. I'd love a positive review and share
00:15:58.480 | it, subscribe. And my book is coming out soon and I can't wait. This is the mindset that I've used to
00:16:04.000 | write "Buy This, Not That." So check it out at financialsamurai.com/btnt. I hope you can pick up
00:16:11.120 | a hard copy too because the hard copy has all the beautiful art and the charts. Shout out to the
00:16:16.480 | artist Kaleem Kong Savage. And also shout out to the Pomeroy Recreation and Rehabilitation Center
00:16:23.200 | to help children and adults with disabilities live their best lives. They are starting an amazing
00:16:31.120 | inclusive daycare center where one-third of the children will have disabilities, one-third will
00:16:37.200 | come from lower income households. And they have found that the sooner we are exposed to people
00:16:44.000 | with differences, beautiful differences, special differences, the more accepting, empathetic,
00:16:50.160 | and inclusive we will be as adults. Roughly 15% of the world's population has some sort of
00:16:57.120 | disability, ranging from mild to very severe. So I think this is the minority group that we need to
00:17:03.440 | fight most for. I'm proud to be donating $5,000 of the book royalties to the Pomeroy Recreation
00:17:11.120 | and Rehabilitation Center to help develop this inclusive daycare. And I want to thank you for
00:17:16.960 | supporting the book and everything that I've been doing. It's been a long journey but we are
00:17:22.480 | finally here and I can't wait for the book to come out on July 19th. Thanks so much!