Tuesday, October 14, 2008

The 1 and 5 formulae

It seems the world is in financial trouble. Very easy to ask why. Why?
Because almost everyone is living beyond their means. I've come up with a simple formula to gauge if you are living within your means. This applies mainly to people between the ages of 25 - 40.
It's called the 1 and 5 formula.
Basically, you should only buy a car that is 1 year's worth of your monthly salary, and owning a house that is not more than 5 years of your salary.
For instance, an example would be a person earning approximately 5k a month (gross basic). That means he should be driving a car worth about 60k, and paying for a house worth about 300k on the market.
If the person is using a nicer car than that, or staying in a house that's worth more than that, then he's living beyond his means. Either that or he has a very nice undeclared tax-free income on the side.
The only ironic part is that economic growth depends on people spending more than they did in the corresponding period. So there.

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