How To Determine What You Can Afford?

[GoldenEagle]

How To Determine What You Can Afford?

by JOE PLEMON on APRIL 8, 2013

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!

How do you determine what you can afford?

[revolutionist90]

I agree with everything except how to choose a college to avoid student loans. I was blessed enough to go to college without having to take out any loans. So far I have had to incur $1100 in loans due to an emergency while studying abroad. I disagree because depending on what type of major you need that community college might not be the best option and not all people can be accepted on transfer when going to a state college.If you want to be a neuroscience major and the college only goes as far as biology there goes a dream crushed. I would actually like to say that the state colleges can be more expensive since they really on federally funded loans while the private colleges usually provide some sort of scholarship. Private colleges usually help people under a certain income a little better also in terms of scholarships. I think when choosing a college it depends on just the financial situation of the college itself. My private college is very expensive but it has very good financial aid and was better than many state schools that I had looked into. I do agree with working like crazy but let's face it in this economy people are not hiring no-degree college students whom might not even be able to work full time due to lab. Sure it is very possible to be a full time student and have a full time job but the job market is very much slumped right now.

But other than those little quibbles it was a good argument.

[GoldenEagle]

I agree with everything except how to choose a college to avoid student loans. I was blessed enough to go to college without having to take out any loans. So far I have had to incur $1100 in loans due to an emergency while studying abroad. I disagree because depending on what type of major you need that community college might not be the best option and not all people can be accepted on transfer when going to a state college. If you want to be a neuroscience major and the college only goes as far as biology there goes a dream crushed. I would actually like to say that the state colleges can be more expensive since they really on federally funded loans while the private colleges usually provide some sort of scholarship. Private colleges usually help people under a certain income a little better also in terms of scholarships. I think when choosing a college it depends on just the financial situation of the college itself. My private college is very expensive but it has very good financial aid and was better than many state schools that I had looked into. I do agree with working like crazy but let's face it in this economy people are not hiring no-degree college students whom might not even be able to work full time due to lab. Sure it is very possible to be a full time student and have a full time job but the job market is very much slumped right now.

But other than those little quibbles it was a good argument.

If you can go to college without taking out any loans you are very blessed. Few college students graduate without debt these days.

Regarding CC (community college) if I had the chance to do it over again I probably would’ve gone to CC before transferring to a state/private 4 year university. Also, something to consider when considering where to go to college if you’re a resident of where you attend you pay less tuition as I understand it.

I do agree there are lots of opportunities for college grants or scholarships out there.

I would advise any college student to work during the summers to make money to pay for books, set up an emergency fund, and/or to buy a reliable vehicle cash for post-graduation.

Thanks for sharing your thoughts Rev.

God bless,

GE