One of the questions that I am interested in when people here talk about living below their means is: how far?
When Americans have a net negative savings rate, we can all agree that this situation is not it. But are there some metrics and what is practical. For example, could this be measured in terms of gross income. If I save 20% of my gross income each year, am I living below my means? For the vast majority of Americans, this would be an extreme case but I sense (perhaps incorrectly) that this might be pretty standard or perhaps even low for people here. Or thinking of this another way: perhaps looking at gross income is the wrong approach. It may not even be about income because I bet that many people here have a considerable amount of unrealized income from their own businesses (if The Millionaire Next Door is any indication).
Let's think of this differently. What are the key financial metrics (if any) that could be used to characterize LBYM? Personally, I would start with the basic definition that LBYM means no short-term debt. Perhaps not when you start, but when you are actually there certainly. I have been playing with this metrics question because I have not been happy with what I have seen and people (including myself) benefit from metrics.
The Millionaire Next Door suggests a little equation to measure whether individuals are good accumulators of wealth and it measures this using (a) age , (2) current income, and (3) net worth. Its not a bad measure, but its not great either. The overal measure is clearly skewed to make older people look good. The measure is linear in age when it should be exponential, for example.
The ideal metric(s) should be independent of whether you are wealthy or not, of course. Its not about the level of your means, but whether you can consistently produce more than you consume.
The ideal metric may also need to include your effective tax rate or simply look at net income (both earned and other).
I would imagine--again, perhaps incorrectly--that many of the folks here would distinguish between net worth in terms of assets vs. investments. Non income-generating wealth (such as your home(s) might need to be considered as a distinct class).
Thoughts appreciated.
When Americans have a net negative savings rate, we can all agree that this situation is not it. But are there some metrics and what is practical. For example, could this be measured in terms of gross income. If I save 20% of my gross income each year, am I living below my means? For the vast majority of Americans, this would be an extreme case but I sense (perhaps incorrectly) that this might be pretty standard or perhaps even low for people here. Or thinking of this another way: perhaps looking at gross income is the wrong approach. It may not even be about income because I bet that many people here have a considerable amount of unrealized income from their own businesses (if The Millionaire Next Door is any indication).
Let's think of this differently. What are the key financial metrics (if any) that could be used to characterize LBYM? Personally, I would start with the basic definition that LBYM means no short-term debt. Perhaps not when you start, but when you are actually there certainly. I have been playing with this metrics question because I have not been happy with what I have seen and people (including myself) benefit from metrics.
The Millionaire Next Door suggests a little equation to measure whether individuals are good accumulators of wealth and it measures this using (a) age , (2) current income, and (3) net worth. Its not a bad measure, but its not great either. The overal measure is clearly skewed to make older people look good. The measure is linear in age when it should be exponential, for example.
The ideal metric(s) should be independent of whether you are wealthy or not, of course. Its not about the level of your means, but whether you can consistently produce more than you consume.
The ideal metric may also need to include your effective tax rate or simply look at net income (both earned and other).
I would imagine--again, perhaps incorrectly--that many of the folks here would distinguish between net worth in terms of assets vs. investments. Non income-generating wealth (such as your home(s) might need to be considered as a distinct class).
Thoughts appreciated.