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If you've ever been strapped for cash, you've probably thought about the value of a dollar and the importance of making it stretch. Faced with a financial disaster or a haemorrhaging bank account, suddenly the memories of blowing savings on extravagant iPod accessories come rushing back. In the midst of researching the resale value of iPod gloves, it strikes you that it's time to reduce expenditures and simplify your life to make ends meet. But just how much money does it take to get by? To find out, we have to distinguish needs from wants. That can be a difficult task.
Even when headlines report bad news about unemployment rates and ballooning inflation, the poorest people in developed economies are doing better than most of their ancestors did. Economist Julian Simon says that there may be no free lunch, but at least it's getting cheaper and cheaper. We don't have to live like monks and take a vow of poverty to live comfortably. But, on the other hand, as our standards of life skyrocket, so do our expectations.
For example, most of us couldn't go without our cell phones for one day. When asked if we really need them, we can argue "for my job" or "in emergencies." We probably won't die without them. But such a utilitarian definition of "needs" arguably takes the life out of living.
So where do we draw the line when we budget? Do we make allowances for our physical and mental health? Although we may get rid of gym memberships and days at the spa, should we cut healthy-but-pricey foods from grocery lists and stop the occasional trip to the movies?
Then there's the saving face factor. Economics expert Adam Smith argues that social embarrassment plays a part in determining necessities of life. For instance, if not owning a microwave oven makes other people think you live in poverty, it counts as a necessity from a social perspective. But people got along fine without microwaves for millennia.
Although it's nearly impossible to determine a definitive dollar amount to answer our question, it'll help to look at one standard: the United States Census Bureau's poverty threshold.
Governments routinely measure poverty, but finding the most appropriate standard is difficult and controversial. Some nations gauge relative poverty -- compared to other people or the median income. Other nations, like the United States, measure absolute poverty -- based on the costs of essential items like food and housing.
To help us draw the line, in the 1960s, research analyst Mollie Orshansky created the basic formula that the U.S. still uses to determine the amount of money sufficient to live on. It uses the prices of food items that make up an adequate diet, based on the Department of Agriculture's guidelines. After adding up a year's worth of food, Orshansky multiplied the cost by three -- relying on a 1955 study that showed that a household spends a third of its income on food. The resulting number represents the before-tax income one person could reasonably live on.
The U.S. Census Bureau adopted Orshansky's method as its official poverty threshold -- meaning that those who make less than the threshold amount are in poverty. The Census Bureau began updating this figure annually, using changes in food costs to account for inflation. In 2007, the threshold was $10,590 for one person and $21,027 for a family of four with two children under 18.
However, some people raise objections to this method when it comes to determining who ranks as "poor." They say that the cost of living varies depending on whether a person lives in a rural or urban region. Other people say that the poverty threshold is outdated and point to studies showing that currently only one-seventh of the American family's spending is for food. Yet other people argue that a person's income should include government assistance programs like food stamps, so that we can more accurately assess whether government programs ease poverty problems [source: CBS].
You may be surprised to learn that 97 percent of America's poor own televisions and that 62 percent have cable or satellite programming. Some people consider these statistics evidence that the threshold is too high. Other people believe that additional factors are at work behind these reports. Both excessive social pressures and the accessibility of credit may encourage people who are already struggling to make unnecessary purchases.
Despite the complications and variables involved in determining exactly how much one person needs to live, there are a few factors to consider when assessing your needs. To find out how much you're currently spending, read How Fixed Expenses Work and How Non-Fixed Expenses Work, then try our Monthly Cash Flow Calculator.
In addition to discovering the amount of money it takes to live on a day-to-day basis, it's smart to consider emergencies and retirement needs.
To get down to the nitty-gritty, let's take a look at some tips to help us live within our means.
WAGING WAR ON POVERTY
The U.S. poverty threshold can help us gauge if poverty is decreasing or increasing.
But can raising the federal minimum wage reduce poverty? This is an ongoing debate. Those who support raising the minimum wage believe that putting more money in the pockets of minimum wage workers will help them rise from poverty.
However, opponents cite the effects of a minimum wage hike on businesses, who will likely lay off workers and decrease hours for the remaining employees to offset the increased cost.