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.)

Ask the right questions

All you have to do to figure out whether or not you can afford something is answer these two questions:

1. Do you already have enough money today to pay the purchase price? (If not, you can’t truly afford it.)
2. 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.

You have choices

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, 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

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.