When looking at making a purchase (especially a large purchase) it’s an excellent idea to figure out whether or not you can afford it. Doing so is not really that complicated.
But people usually ask questions like these in order to try to figure it out: What percentage of our take home pay should our mortgage be? How much should I be spending on transportation?
The thing is, those are the wrong questions. (Or at least they aren’t going to help you answer the “can I afford it” question.)
All you have to do to figure out whether or not you can afford something is answer these two questions:
- Do you already have enough money today to pay the purchase price? (If not, you can’t truly afford it.)
- If you do have enough money, is there a possibility that you might need that money in the future for something else that’s more important, like an emergency? (If so, you can’t afford it.)
You might be thinking, “But if I wait until I have the cash to make a large purchase, it’ll take forever and I’ll never buy it!”
I disagree, but I’ll talk about borrowing money in a bit. In order to pay cash for major purchases like houses and cars, you have several choices:
- Take temporary measures. You can buy something that you do have the money for right now to tide you over until you get together the cash for what you really want. The classic example of this is driving around a $2000 car while you save up for the more expensive model. Or riding the bus until you have that $2000 for your first car.
- Compromise. Maybe you don’t really need a Ferrari when you’d be equally happy with a less expensive car. Maybe you could live on the outskirts of town instead of in an established neighborhood.
- Delay. We lived without dining room furniture for years because we couldn’t find something that we both liked and could afford. Now that we do have dining room furniture, I sometimes miss the old empty space.
- Buckle down. If you really want something, make it the priority. Cut back, do odd jobs to earn extra money, get started with a few passive income ideas, etc, and put every cent you make toward the item you want. It’ll add up faster than you think.
If you still want to borrow money, at least ask the real questions: How much risk do I feel comfortable in taking so that I can get what I want now without waiting? Will I still think making payments was a good idea if I lose my job? Will I be locking myself into a certain life if I make payments?
If I do have the cash already, do I think I will realistically get a better return on my money by borrowing than I would by just paying cash? Will it still be worth it if I’m wrong?
Really consider the possibility of nothing going like you’d planned, and see whether you’d still feel comfortable borrowing then.
Posted in Debt on 04.22.10 with 16 comments.
This is so true! I’ll be paying off a credit card next month that has been maxed out since almost the day I got it. I’d buy something with the justification in my mind that I could afford it because I could afford the monthly credit card payment. If I calculated all of the interest and fees and applied that to the purchase price of some of the items I bought I doubt that I’d still want them at that higher price.
Woohoo Pam for getting ready to get that card paid off! That’s going to be great feeling.
I just had a conversation about this with one of our friends! He was arguing that they could afford a new car since they could make the monthly payment if nothing changed. I was arguing that if anything changed, they’d miss the monthly payment and be much worse off. He actually saw it from my pov and agreed (eventually).
I was so happy (for them too)…that’s the first time I wasn’t just blown off for having an opinion that no one wants to hear.
I like your opinions
And maybe your friend seeing your point this time will be a turning point for him.
What always shocks me is the level of entitlement we have collectively. Have you noticed this? When you tell someone they really need to save up for an item before purchasing it, it’s taken as offense. Easy credit is such a recent experience, yet we have all so easily fallen into this lunatic state of believing we *should* have whatever we want, whenever we want it and are offended if anyone states otherwise. My grandmother would slap someone upside the head for such nonsense. That someone, of course, being me for most of my life! I’ve only learned the lesson of true affordability over the past few years. Oy.
CF, I think the entitlement has become so much a part of our culture that we don’t even realize we’re feeling that way. Even when I wrote this post, I wondered if I would get comments talking about how unrealistic paying for things with money that you already have would be…
I’m glad that didn’t turn out to be the case.
@CF, great points. It does seem that our culture has embedded debt as the first choice for paying for anything we need or want. It does seem that our culture is living on an inflated budget by using debt. I wonder if our culture, who is now used to the “big city”, could ever go back to living the slow life of the “country”?
@Jackie, Great post! Very realistic, practical advice!
Keep up the good work,
Eric
Thanks Eric
I wish I’d had this perspective before I got myself into credit card debt. Such a great lesson to learn. A simple set of conditions that everyone should check off before getting themselves into debt.
Keith, I wish I’d had this perspective from the get-go myself. I’d be in such great shape financially it’d be silly. Still, I can see huge difference already since I stopped borrowing money. I can’t wait to see what things are like when we get the mortgage paid off too.
I have thought about taking out a loan to buy some dining room furniture but luckily someone gave me this same advice. While I hate seeing boxes only in my dining room, I know that one day they will be gone and I won’t add another payment to my monthly bills.
Kate, boxes in the dining room are a whole lot better than loan statements in the mailbox!
I agree with Keith! I wish I had this perspective a long time ago….
Ditto, and hindsight sure is 20/20.
Jackie, learning alot from your blog!!! thanks!
Thanks Joey