It's an important distinction
I saw this article the other day, about the Beckhams building a swimming pool or some such nonsense in their '6 million pound house'. Then I realised that 6 million is a fraction of their yearly income.
For them to build a 6-million pound house is kind of like for me to buy a house for 500,000 yen. I wouldn't really have to think about it too much.
This shows us the importance of relative cost. Relative to what? Your income, of course. Income is the key metric. Wealth is less important than how much income it produces sustainably.
This is the key concept behind ancestral wealth: never spend the principal, only the income.
I think a lot of people miss this. It's probably why lottery winners go broke so often. Also people who inherit more money than they are used to. They don't understand this concept. It's not how much money you have, it's how much cash flow you can receive each month or year.
Financial Samurai's car-buying rule uses the concept of relative price. I like it very much. Of course, applied strictly, that rule means that we would just about be able to buy our current car again today ;)
The 'value of your time' metric from Your Money or Your Life is based on a similar principle. Figure out how much money you make per hour working (make sure you include the time spent commuting, or getting ready for work, shopping for work clothes, etc.) and then use that figure when you think about buying things. Is this <thing, experience> actually worth x hours of my time?
Right now we're thinking about buying something that costs seven times my gross annual income. It's a very new experience for me and I don't have a good mental model for it.
I guess thinking about the monthly or yearly payments on the mortgage compared to our monthly or yearly income would be one way of looking at it.
We could also compare it to alternatives, like how much it would cost us to rent, or continue living in our current place.
I'll have a lot more to say about the house in our next post, but until then how do you think about money? Do you have any metrics you use to figure out the value of things?