How to Determine What You Can Afford

[GoldenEagle]

Read this today... Thoughts? How do you determine what you can afford?

How to Determine What You Can Afford

Apr 08, 2013 10:00 am | Joe Plemon

How do you determine what you can afford? Do you have clearly established criteria or do you tend to buy first and then pray you didn’t just spend your mortgage payment? Obviously, you are better off with some rationale behind your spending decisions, but establishing those guidelines can be tricky. The following self interview will help, starting with the wrong question:

“Can I make the monthly payments?” Wrong question!

There is a reason why merchants emphasize ‘low monthly payments” instead of purchase price – they want to ensnare you and your money for years to come. This is a wrong question because it presupposes that your purchase will entail debt. Think about it: If you rationalize all of your acquisitions because you can meet the monthly payment, you will eventually obligate every penny you earn to pay others for your stuff. Bad idea! Learn, instead, to pay yourself by training your brain to filter “monthly payment” from your vocabulary. The next question is much better . . . .

“Do I have enough money to purchase this outright?”

Isn’t this a better question? Affording something means you have the money to purchase it. Of course, simply having the money doesn’t mean you should make the purchase, but if your answer to this question is “no,” then you can’t afford it. If you said “yes,” move on to the next question.

“Does this purchase fit within my budget?”

If you said “yes,” you can afford it. My wife and I, for example, budget money every month for clothing, so the amount of money we have accumulated for clothing (which we keep in a “clothing envelope”) dictates what we can afford to spend. Simple and effective. However, if the acquisition would require modifying your budget, you should either not make it or ask yourself the next question.

“Would this purchase fit within my overall financial plan?”

If, for example, you are currently focused on getting out of debt, nearly any spending above what your budget allows could sidetrack that focus and should therefore be avoided. However, if you are debt free, you may have more flexibility in modifying your budget. Before doing so, if you are married, make sure you and your spouse agree.

Although my wife and I had saved money for a replacement car, we recently agreed to drive our current vehicles for a few more years and spend that money to renovate our kitchen. Candidly, this was a struggle because, even though we had the money in the bank, we nevertheless felt some guilt in spending so much money on a want rather than a need. Fortunately, we talked it through and reached peace in our decision. Today, now that the kitchen project is complete, we are thrilled that we went ahead with it.

Some Final Questions to Ask Yourself

So far we have said that you can afford a purchase if you have the money and it is either in your budget or you and your spouse agree to modify your budget to include it. However, even if you can afford to spend the money, the following questions can help determine if you should spend it:

Is this an impulse purchase or a “bargain deal” you must act on immediately?

If so, wait at least 24 hours before buying it. Doing so will not only allow your adrenaline rush to reacclimate, but will also relieve the pressure of buying with a time constraint.

What are some alternative uses I could make with the same money?

You may be able to afford a new $40,000 car, but considering other uses of the money may prevent tunnel vision if you have a tendency to get locked in on a purchase. For example, what if you paid $20,000 for a car and used the other $20,000 to help a needy college student or a single mom? Or pay $10,000 for a car and use the rest to help several college students and single moms? Or decide against a new car altogether and invest the $40,000 for retirement? You get the idea – consider your options!

Mortgages and Student Loans

Whereas I previously said that you can’t afford to buy something you can’t pay cash for, I realize that very few people can pay cash for homes or go without student loans.

This being said, I would lay out the following parameters for affording a home:

• Be debt free.
  
• Have fully funded emergency fund (3-9 months of expenses).
  
• Have savings for the down payment.
  
• Limit the purchase to a 15-year fixed rate loan with payments not more than 25% of your take-home pay.
  

Concerning student loans, I don’t think anyone can afford to blindly pile them up with the fuzzy notion that, “I will pay them back once I graduate and make lots of money.” Reality check: You may not graduate or you may not find a job or you may not make lots of money. Assuming you don’t have a college nest egg, your plan should be to attend community college your first two years, attend state college your last two years and work like crazy the entire four years. If you borrow any money before graduating you should continue, after graduation, to live like a college student until the debt is gone (which means very frugally, of course).

One Last Thought

Ask yourself: “Will I be happy – or will I be regretful – a year from now, ten years from now, or thirty years from now if I make this purchase?”

Hopefully, you will be very happy!

[Tinky]

If I open my purse and there's no money in it, then I can't afford it.

[missmuffet]

If I open my purse and there's no money in it, then I can't afford it.

LOL!! Unfortunately that is what I do most of the time.Open my wallet and say "Well,I am not getting this today".

[GoldenEagle]

If I open my purse and there's no money in it, then I can't afford it.

Unfortunately people often resort to the credit card instead of saying "I can't afford it." You're doing great Tinky!

[angels4u]

If I open my purse and there's no money in it, then I can't afford it.

Unfortunately people often resort to the credit card instead of saying "I can't afford it." You're doing great Tinky!

That's so true... alot of people want to get something ,they think they can fill a void in their heart with getting stuff.

There's a difference in needing something or wanting something.

Only God can satisfy our heart.....and if we don't need it or we don't have the money don't uses the credit card!

[missmuffet]

If I open my purse and there's no money in it, then I can't afford it.

Unfortunately people often resort to the credit card instead of saying "I can't afford it." You're doing great Tinky!

That's so true... alot of people want to get something ,they think they can fill a void in their heart with getting stuff.

There's a difference in needing something or wanting something.

Only God can satisfy our heart.....and if we don't need it or we don't have the money don't uses the credit card!

Yes,their is a difference in praying for what we need and what we want.I don't need a house on 10 acres with three bedrooms of my own but it would be nice to have that.But I definately need food to eat or I will starve.

[angels4u]

If I open my purse and there's no money in it, then I can't afford it.

Unfortunately people often resort to the credit card instead of saying "I can't afford it." You're doing great Tinky!

That's so true... alot of people want to get something ,they think they can fill a void in their heart with getting stuff.

There's a difference in needing something or wanting something.

Only God can satisfy our heart.....and if we don't need it or we don't have the money don't uses the credit card!

Yes,their is a difference in praying for what we need and what we want.I don't need a house on 10 acres with three bedrooms of my own but it would be nice to have that.But I definately need food to eat or I will starve.

agree

[CaliforniaJosiah]

If I open my purse and there's no money in it, then I can't afford it.

Pretty good!

I have a written budget. It includes 15% into savings/investments and 15% to charity (10% to my church, 5% to other things, not all of them Christian or ministires).

I SAVE for some thing, putting money ASIDE each month for some things: Vacation, Christmas, etc.). When those needs come, I just transfer the savings to my checking - the money is there.

I have few bills: my rent (I have a lease on a 2 bedroom/2 bath condo), car payments (I recently bought a Mazda Miata - I made a 50% down and I'm paying the rest over 3 years, with a 0% loan the dealer offered). I have my home utilities - including internet, and my cell phone. I have all of these on autopay - which makes it easy; the rent payment is at times the only check I write and the only bill I mail; even my church offering is done by auto transfer, electronically.

My advise: BUDGET. And be a slave to it. Works for me.

- Josiah

It works.

[GoldenEagle]

If I open my purse and there's no money in it, then I can't afford it.

Pretty good!

I have a written budget. It includes 15% into savings/investments and 15% to charity (10% to my church, 5% to other things, not all of them Christian or ministires).

I SAVE for some thing, putting money ASIDE each month for some things: Vacation, Christmas, etc.). When those needs come, I just transfer the savings to my checking - the money is there.

I have few bills: my rent (I have a lease on a 2 bedroom/2 bath condo), car payments (I recently bought a Mazda Miata - I made a 50% down and I'm paying the rest over 3 years, with a 0% loan the dealer offered). I have my home utilities - including internet, and my cell phone. I have all of these on autopay - which makes it easy; the rent payment is at times the only check I write and the only bill I mail; even my church offering is done by auto transfer, electronically.

My advise: BUDGET. And be a slave to it. Works for me.

- Josiah

It works.

I agree.

We're on a budget as well. We try to save/invest 10-20%, give 15-25% (including tithes and offerings) and live on the rest. We spend on paper every month every penny of what we earn. That way no pennies get lost.

We also have an emergency fund above and beyond any savings accounts for purchases, etc.

Being on a budget is the best thing we could ever have done. It's sometimes difficult to stick to it but it's the best way to track money. Paying cash because we save for things is actually better than no interest offers.

Good thoughts brother!

God bless,

GE