What is the minimum amount of money you need to live comfortably? This is a personal decision, so there isn’t a right or wrong answer. One person might say that they wouldn’t be able to live comfortably on less than $70,000 per year. Another person might be fine with less than $10,000.
Why is this number important? I think your poverty threshold is a measure of your flexibility in pursuing your dreams.
Let’s say you have an inkling of a dream career you would like to pursue. But in order to work at that career you would have to start earning about $20,000 each year. Could you make the switch?
If your threshold was $10,000, this might not seem like such a bad trade. You would still be able to live comfortably, and if you worked hard, you could probably earn more income with that career later. Especially if your dream career was running a business where you might be able to earn $100,000 or more each year if you focused on growing your earnings.
But what if your poverty threshold was $40,000. Would you be able to make the trade? Probably not. Living a few years on $20,000 would seem like too large a sacrifice, even if you loved the work.
My Financial Threshold
As a 19-year old University student, I can’t claim financial independence from my parents. I pay for most of my expenses, but my family has always agreed to help while I go to school. I’ve marked out my poverty threshold at $20,000. And while I’m not earning that amount from this blog yet, I’m planning to become financially independent before my 21st birthday.
When I finish my degree, I expect that I could live as I do now on about $15,000 per year. Depending on what part of the world you live in, this threshold may seem incredibly low or incredibly high.
My poverty threshold is the level of income I would need to earn in order to not get a second job. I love writing, so if I can earn above my threshold, it means I can devote all my energies to work I’m passionate about.
I’m not writing this article to criticize people with a high threshold. Having kids, a spouse, car payments, mortgage payments or living in an expensive city can all increase your threshold. But hopefully if you become conscious about what your threshold is, you can see how it will affect any changes you want to make in your life.
Lowing Your Poverty Threshold
The purpose of this article isn’t to compare thresholds, but possibly get you thinking about ways you might be able to lower your own threshold. Since having a low-threshold gives you more options, lowering your current threshold gives you the ability to make changes in your life that others might not be willing to make.
Here are a few decisions where poverty threshold might play a role:
- Quitting a job you hate to find a new job.
- Going back to school to further your education.
- Starting your own business.
- Scaling down the hours you work to spend more time with family.
- Going on a sabbatical to travel the world, learn or experience new aspects of life.
- Developing a skill which you later hope to turn into an income-generator.
In each of these questions, the lower your threshold, the more flexibility you have.
How can you lower your threshold? Since I’m not above my threshold from this blog at the moment, I’ve been thinking a lot about ways I can lower my threshold. Here are a few I came up with:
- Be Frugal. Cut expenses ruthlessly. I started keeping much tighter control over my expenses by putting in place a monthly budgeting system and recording everything I spend money on. Already this has helped me avoid unnecessary expenses.
- Find Work You’re Passionate For. Your poverty threshold might be higher, simply because you haven’t found any work worth sacrificing for. If you absolutely loved waking up in the morning to do your job, you might be happy even if you have to live on baked beans and brown rice for a year or two.
- Find a Cheaper City to Live in. I once knew a guy who sold games online, while he lived in a South American country. Since his earnings were in US dollars, but his expenses were much lower, he could pursue his dream full-time. Someone living in New York City or Tokyo might not be able to do that.
- Shift Your Focus. If your view of life is mostly focused on material wealth, it will be hard to have a lower threshold. If your life is focused on taking on challenges and doing meaningful work, you can be comfortable living on less.
- Change Your Habits. What you eat, how you commute and where you get your entertainment are all based on habits. If you’ve conditioned yourself to live on a high income, your threshold is going to be shifted upwards. So if you want to become more comfortable on less income to make a big decision in the future, you might want to start changing your habits today.
- Pick More Diverse Friends. If most your friends are in the same tax-bracket, it will be harder to push to a lower income level. I think picking a diverse group of friends ranging from janitors to CEO’s reduces the peer pressure to stay in a job you hate if the money is good.
- Make Gradual Steps. Going from $100,000 per year to $10,000 each year is a severe step. While drastic steps might be necessary, try gradually shifting your work and income. Do a bit of consulting work on the side until you can finally open your business. Slowly reduce your expenses and increase your savings until you can make the jump. If you can’t take the plunge, lower yourself in slowly.
Tell me what you feel your poverty threshold is. What are you earning right now and what is the level of income you could live on? Try to include what part of the world you live in and what financial commitments you have (kids, spouse, house, etc.). I’m curious to see what the number is that would help you pursue your dreams.