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“Can I afford that?” Probably not…

by Matt Jones, CPA
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I was asked “how do I know whether I can afford to buy something?”

I’ll share my answer, but you may not like it. In most cases the answer to “can I afford this” is no, you cannot afford it, whatever it is. Because we’ve lost sight of what the term “afford” means.

To begin, and before we define afford, you need to have a budget. I believe in making a budget once each year and sticking to it fairly closely, but not spending too much time or energy on it each month. I build in a cushion because issues and unforeseen expenses always pop up.

Make a simple budget, automate as much as possible, and track your Net Worth. Here’s an example of a budget created with my template.

If you don’t have a monthly budget yet go ahead and make one now. You can use my tool or a sheet of paper listing income after taxes and monthly expenses. Seriously, do this now. It’s okay, I’ll wait…

Doesn’t it feel great to know where you stand financially? Good job! Now let’s get into the details.

(Don’t) Pay Over Time

There are few things that should be paid for over time: monthly expenses like rent, utilities, groceries, etc. and very large purchases such as a house, car, or college education. In general, monthly payments don’t make sense for other purchases. 

And yet, we’re led to believe that buying things and traveling leads to a better life. So far (and I’ve been looking) all I find that truly improves my life Is time with family and friends (maybe I’m an old softy here at 32). 

I also value peace of mind – not having to worry about or be overly anxious for my family’s well-being. The largest contributor to peace of mind that we can control is our personal finances. After all, money is the number one stressor for 54% of Americans. 1

We used to save up to buy things. Now, credit and payment plans are widely available and heavily advertised for everything. From clothes and shoes to travel and entertainment we’re pushed to pay “over three easy payments” or use “free financing”. Social media makes us feel like everyone else is living better than we are and having a better life because they have more stuff. Please note: they are not.

“The things you own end up owning you”

Chuck Palahniuk

Subscription Economy

It seems like we’re headed toward a world where everyone pays $9.99/month for twenty things they impulse bought last year plus Netflix. You can’t blame businesses for trying… subscriptions are less likely to be cancelled and payment plan options increase sales conversions. There’s a high premium on company valuations with subscription-based revenue models for these reasons.2

All of us, myself included, are guilty of failing to budget properly or giving in to temptation (once in awhile). Most of us have credit card balances for clothes, restaurants and travel. This causes mental stress because we end up paying down that balance over months (or even years). During that time, the clothes wear out and the food and travel become distant memories. 

As a result, we resent the items and experiences we bought and perhaps even the people we enjoyed them with. When I spent nearly a year paying off my credit card balance I felt that same anxiety. On the contrary, paying cash for purchases leads to reduced stress. Imagine if you could leave for a vacation knowing it’s completely paid for already (or at least budgeted). 

So if swiping your card or financing over time are the wrong actions, how should we think about making purchases? After all, there will be times when you want/need to make large purchases and financing will be required. I’m not suggesting you live like a hermit (you deserve to treat yourself from time to time). But, I believe from experience that planning and saving leads to reduced stress. 

Check back for part 2 of this topic series. I’ll help you understand what you can afford now and what financial milestones you should achieve to increase that threshold. I’ll give real examples and exact next steps. Stay tuned!

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