How much money do I really need to live?

The Poverty Threshold: Analyzing Needs and Wants

Orshansky took the cost of the cheapest, minimum adequate diet to establish her poverty threshold.
Orshansky took the cost of the cheapest, minimum adequate diet to establish her poverty threshold.
iStockPhoto/James Steidl

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 [source: Michael]. 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 [source: U.S. Census Bureau].

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 Other people say that the poverty threshold is outdated and point to studies showing that currently only one-seventh of the American family's spending is for food [source: CSM]. 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 [source: Rector]. 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.