AOM, is it accurate in terms of forecasting?
My AOM is 270 days and I started to think about this a bit today in terms of accuracy and forecasting. What I found to be VERY interesting is that if I took my last 5 months of income (averaged out monthly) AND last 5 months of expenses (also averaged monthly), I came up with an average monthly deficit of X dollars which, when I divided by my current cash holdings, equaled to be exactly 9 months before I spent down to zero, presuming that my income remains as it was before.
Is this a blip or a fortuitous event that I have just discovered?
AoM is not accurate in terms of forecasting, or budgeting health, or even financial health.
It simply tells you how long you have had the money you just spent.
Does anyone know how to link to a specific reply on another post?
dakinemaui 's comparison of how AoM vs. CTB answer key questions could be of interest here.
Go to this link:
And scroll until you see the start of this reply:
- 17 hrs ago
I think you're mixing the two types of "buffers": 1) Jesse's hold money for 30+ days (Old Money) or 2) Live on Last Month's income (Classic Buffer). Furthermore, #2 increases the age of your money, but #1 does not necessarily yield #2.
I do not know how to make those links pretty on my phone, sorry.
AoM is a backwards looking spending metric, and you could have a huge AoM and be flat broke. Under a VERY limited set of conditions -- consistent income and expenses -- there will be a weak correlation with cash on hand (and therefore a predicted point to run out of money). True Expenses (non-monthly outflows) will significantly obfuscate this, however.
The fact it agrees now is pretty exceptional, since AoM is based on your last 10 cash transactions, which usually bears no resemblance to average spending.
Thanks all for the responses, and I do understand the stated metric behind AOM. I like to play with math and numbers and just found it very fascinating to see a (even if unintentional) correlation between AOM (270 days stated) and exactly how long my current cash holdings 'might' last based on averaging the gap between 5 months of outflow and 5 months of expenses. As an example, I have around $29K in current cash holdings (we recently sold a house), and with my current rolling monthly deficit of $3.2K (average expenses versus average income), my 'stash' came out to 9.01 months of 'coverage' which matches AOM very well. I'll keep playing with this on a monthly basis to see if my theory is accurate or not...
Move Light Sound Life said:
Perhaps the drop will happen I have more transactions. Yep.
AoM includes a 10-transaction averaging step, which introduces a lag to the response. Those $1 transactions simply clean out the window, effectively giving you the raw age (which could be higher or lower than the averaged value).