What Can You Afford?
A lot of people think that they can afford something if they can take it home from the store without stealing it. Sure, you can buy it, but can you afford it?
This distinction is exactly what lands so many people in credit card debt. If you need to make the minimum payments on your credit card to pay for something, then you can’t afford it. If your car loan is eating away at other critical parts of your life (lower food budget or living in inadequate housing), then you probably can’t afford the car.
Obviously, large expenses are tough, but what about little ones? $6 at a deli each day for lunch. $14 for a pizza once or twice each week. How do these gratuitous indulgences affect the rest of your life? Money that you spend on fast food or expensive clothes can’t go towards securing your financial future and it certainly can’t go towards paying off student loans and debts that are only accruing interest and putting you farther in debt.
Seriously, if you owe money on a student loan or debt, how are you justifying frivolous expenses? Your first goal should be to pay those off to minimize the interest you pay or putting your money into some savings vehicle that gains more interest than your debt and then paying it off! Keep in mind, if you’re using a credit card, your interest rate is likely between 10-20% these days. There was even one card in 2010 that was charging nearly 80% interest legally!!!
But how do you avoid falling into this debt trap? It is different for everyone. Dan looks at things and determines if he ‘needs’ them or ‘wants’ them and thinks about the value any given expense would bring to his life – if the benefit is worth the cost – he purchases, if not, he puts that money in long-term savings at the end of the month. Dan also considers the value of that savings in 20-30 years. That $6 sandwich he gives up by bringing his lunch to work most days is used towards funding his savings which, on the sandwich savings alone, will grow into over $90,000 in 25 years if you assume only 6% interest! Warren Buffet apparently once estimated he could save over $300,000 over the course of his lifetime by getting his hair cut every 5 weeks instead of 4. I, on the other hand, look at things and do some math in my head. Take my internet bill for example. It’s about $50 each month. I use $10/hr as my go to. In this case, it costs me 5 hours of work each month just to pay for my internet. If I go out for dinner and buy a $12 meal and an $8 drink then I have just spent 3 hours-worth of work towards dinner. Double that if you’re single income and paying for your spouse.
I know people who go out daily for a $6-$8 lunch. That’s almost an hour of work EACH DAY just to pay for their lunch. In an 8 hour work day that’s almost 13% of your work day just to cover one meal. That adds up fast. Frankly, that’s mind blowing to me and it should be to you as well.
So what can you afford? Obviously that question depends on your means, but there are some simple guidelines we can all follow:
- Pay yourself first by putting money into your savings and retirement as soon as you get your paycheck. If you have automatic deposits, even better.
- If you can’t pay your credit card off in full or you have to accept interest financing, you can’t afford it.
- If other areas of your budget start to suffer, you can’t afford it.
It’s easy to justify large purchases like a car, or an engagement ring, or a large piece of furniture as a one-time thing that you can afford to slowly pay off, but you should follow the same guidelines when buying these big ticket items. People think that they have to spend a ton of money on rings and weddings and furniture, but you really don’t. You choose to.
I know a guy about to spend over $20,000 on his wedding. The guy has student loan debts, credit card debts, and normal expenses just like everyone else. Can you imagine how far that money would go if instead he and his fiancé spent some of that on a down payment towards a house together or maybe furniture to decorate the house? Frankly anything other than one day of partying would be more beneficial. Can he really ‘afford’ a $20,000 party? Doubtful, but sadly, that’s the way it’s going to happen.
How do you determine what you can afford? What have you bought that you realized you couldn’t afford and how did that affect the rest of your life? Share your experiences and advice in the comments below!