A lot of times I will refer to what I have invented, the "Power Index of (Your) Money." I have thought about calling this also the "Power Index of Income," but the problem with this is not all financial flow has to necessarily be from one's income. Naturally there are a variety of sources in which someone might have cash flow. So to simplify, and to generalize this to everyone, I just refer to it as PIYM.
If we look at the Power Index Income, we can define this as the amount of leverage you are able to obtain from your income, or realistically how much you are actually making.
Let's take an example of an individual Mark who earns $35,000 a year and compare him to Sandy, who makes $17,000 a year. On the outskirts we can say that Mark is better off, and theoretically he should be but in reality he may not be, or he may be exactly equal with Sandy.
Let's say Mark is a wasteful spender. He doesn't read The Smart Money Economist and he really has no real money management or concept of a dollar. Let's say Mark spends $30,000 a year of his income on wasteful spending. We will set Mark's actual net earnings at the end of the year as $5,000. This is $5,000 that Mark has at his disposal or invested and can be reused. It's $5,000 he's earned.
On the other hand let's say Sandy is extremely smart with her money, maybe even frugal. Sandy may only have $1,000 or less of wasteful or unnecessary spending and thus we can set her income at the end of the year to $16,000.
So who's better off? Clearly Sandy is in this case and is much further ahead of the game than Mark, despite making less than half of his income. We could also set this as a ratio or number if we wouldn't, dividing unwasted income ($5,000) by total income ($35,000) to arrive at a ratio of 0.14, but I think it's only import to understand the concept and not to worry too much about an actual figure.
If we look at the Power Index of (Your) Money, we can just see that this is the ratio of how much leverage or power your money has working for you. In Mark's case it is very little, whereas in Sandy's case it is very high. I would like to refer to Power Index of Money as money can come from a variety of sources: lotto winnings, inheritance, investment, etc. and this gives a broader view of what you have working for you.
