Can you afford it?
It’s the question that you ask yourself every time you want to buy or lease a car. It’s the question and dilemma that everyone faces when buying or renting a house. The same applies to other purchases, big and small. You often ask yourself if you can afford to make the purchase. The real answer often is: No! You cannot afford it! Despite that, you make purchases and take on financial commitments that you can’t really afford!
The concept of affordability is flawed!
What does it really mean to afford something?
Let’s define “Afford”
|synonyms:||pay for, bear the expense of, have the money for, spare the price of
“I can afford a new car”
have (a certain amount of something, especially money or time) available or to spare.“it was taking up more time than he could afford”
- be able to do something without risk of adverse consequences.
“kings could afford to be wrathful”
The Illusion of Affordability
As you can see in the definitions, the common definition of affordability is having enough money to pay for something. This can be a dangerous illusion that leads many to misinterpret and misunderstand the meaning of affordability.
Assessing the affordability of an item should not be based solely on your buying power ability
You think you can afford it because you have enough cash to pay for it. You have $50,000 saved up; therefore, you you can afford a $50,000 car.
You think you can afford it because your credit score is great and can borrow money to pay for it. You have $10,000 saved up; therefore, you can get a $40,000 car loan and buy a $50,000 car.
You think you can afford it because you make enough money to pay for it. You earn $5,000 a month; therefore, you can afford the $600 monthly leased car payment.
You think you can afford it because you have a great good-paying job. You earn $5,000 a month; therefore, you can easily afford the $3,000 monthly mortgage payment.
Slow down! All three examples above can be extremely irresponsible if your understanding of affordability is solely based on your ability to pay for whatever you decide to spend your money on.
If you can pay for it, it does not necessarily mean that you can afford it
The Maturity Curve of Affordability
Maturing your understanding of affordability pays dividends in the long run! It positions you to better assess your true ability to spend money.
Understanding affordability cannot happen in isolation. You will need to think about your goals in life and specifically your short-term and long-term financial goals.
- Are you saving enough money for retirement?
- Are you maxing out your matchable contributing to a 401K account?
- Do you have enough cash set aside in an emergency fund?
- Are you investing in other assets such as stocks or real estate?
- Do you plan on paying off your mortgage early?
- Do you plan on retiring early?
All these questions need careful pondering. Whichever conclusion you come up with needs to be factored in when you are assessing your true ability of affording things in life.
Affordability is an illusion that needs redefining
Suppose you bring home $5,000 a month. You have a mortgage payment (for better or worse in an effort to achieve the controversial american dream) of $2,000 and the rest of the necessary expenses (bills, clothing, groceries, etc.) amount to another $2,000. This leaves you with $1,000.
Does this mean that you can afford to spend $500 on leasing a car and $500 on eating out? Definitely, not! The reason is obvious. There is no money going to savings every month. There is nothing being invested in the stock market. There is no money being set aside for emergencies. How about buying a rental property that makes you money every month?
A more responsible and mature method of evaluating affordability has to take into account budgeting for non-expenses. Budgeting for investments instead of liabilities can some day lead you to financial independence.
Assessing affordability should include budgeting for investments
That $1,000 you have left should perhaps be dedicated to saving $200, investing $400, and the remaining $400 can cover a $200 car payment and $200 on eating out. This is not a perfect recipe. Perhaps a better way is to own an older very reliable car and not even spend anything on car payments.
You can’t afford to misunderstand affordability
No matter how you choose to allocate your money. The point remains that the concept of affordability should not be diluted to just the ability to pay for something. Instead, it should include the big picture of growing wealth, preserving wealth, and potentially getting off the hamster wheel and becoming financially independent before the ever-increasing age of conventional retirement.
Think about this the next time you walk into a car dealership or the next time you’re itching to buy the latest smart phone. Better yet, think about this the next time you contemplate investing in real estate. It can be good for you. It can be better than wasting money on possessions that don’t make you money.
Liabilities don’t make money. Investments do!
Don’t let your misguided understanding of affordability keep you trapped on the hamster wheel.
You cannot afford to not gain your financial independence!
Financial independence is priceless!
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