Can I Afford It?

Buy and Sell car 10 by FunkyFreaks Classifieds on FlickrWith holiday shopping in full swing, I suspect over the next few days and weeks many people will be standing in store checkout lines asking themselves, “Can I Afford It?”

The “It” could be a Christmast gift, a new car, or a gift for themselves. Regardless, there will be a lot of mental number-crunching going on.

Some Thoughts on Affordability

Over the years I have come to loathe the very question of affordability. 99 times out of 100, if you have to stop and ask if you can afford something, you probably cannot afford it. Why do I say that?

Because affordability has been so mangled by marketers and creative financing that few actually stop to do a logical calculation.

Think about it…if I asked you if you could afford a new $40,000 car, what would your response be? What if I asked if you could “afford” a $500 monthly car payment. Chances are more would respond in the affirmative to the second question.

The new car deal offered is really the same. What you don’t consider is that by taking on the 84-month payment plan, the car will really cost you $43,000 when you add interest payments (even at today’s low financing rates).

People have been conditioned to think in monthly terms. Subscription fees, membership dues, car payments, and a host of other expenses are presented in monthly terms.

If you have a gym membership and they sent a letter reminding you it was time to renew with a bill for $359.40 you would probably call to cancel. But what about $29.95 per month? Sounds more palatable, doesn’t it?

One of the best exercises I can recommend to help gain control of your spending is to convert monthly expenses to a yearly cost. It will immediately help you gain perspective that a monthly bill just doesn’t provide.

Here are a few examples from my own household pre-financial turnaround. You can guess the things I immediately cut to help jump-start our get-out-of-debt plan.

  • Gym membership. $29.95 per month. $359.40 annual cost.
  • Lawn treatments. $42.50 per month. $510.00 annual cost.
  • Expanded cable package. $80.00 per month. $960.00 annual cost.

Rather than guessing, I’ll just tell you that we cut all three of these items, and in the process saved over $1,800 that year – which just happened to be the lowest balance on one of our credit cards. In theory, we eliminated that debt simply by eliminating those three expenses, and our lifestyle didn’t really change that much.

Signing Up for Lifestyle Servitude

In addition to considering financial costs when questioning affordability, there should be other considerations when evaluating large purchases.

The fantastic book by MJ DeMarco, The Millionaire Fastlane, refers to a phenomenon called Lifestyle Servitude, whereby we erase more and more of our freedom by creating lifestyle debt.

Here’s how DeMarco describe the vicious cycle of Lifestyle Servitude:

1. Work creates income.
2. Income creates lifestyle/debt (cars, boats, designer clothes).
3. Lifestyle/debt forces work.
4. Repeat…

Sound familiar? How many of you have traded freedom for affordability? Yeah, me too. But part of maturing, financially, is being able to recognize that giving up our freedom for affordable payments is not a game worth playing, long term.

I don’t often wish for financial mulligans (except for the opportunity to go back and save half my income), because I am who I am largely due to how I’ve managed (or mismanaged) my finances in the past. The best lessons are often learned the way. However, if I had it to do over again, I’d love to start with a clean slate – no income, no payments, no debt.

As my income increased, I would not burden it by adding payments for things I really could not afford. I would save, pay cash, and continue to enjoy the freedom to move from place to place, or job to job, without worry over continuing to make payments for my stuff.

I would carry this philosophy into car and home purchases, and any other large expense in my household. If I couldn’t afford to pay cash for a new home, I would rent. If I couldn’t afford a new car, I’d buy a cheap, used one.

If I could not easily afford to cover a year of expenses, I wouldn’t add any new ones (cable, XM radio, gym memberships, etc.). How much different would life be had we taken that path when just starting out?

Sounds radical doesn’t it? Not quite normal. But what is normal? I’ll leave you with yet another great quote from The Millionaire Fastlane:

“Normal is waking up at 6am, fighting traffic, and working eight hours. Normal is to slave at a job Monday through Friday, save 10%, and repeat for 50 years. Normal is to buy everything on credit. Normal is to believe the illusion that the stock market will make you rich. Normal is to believe that a faster car and a bigger house will make you happy.”

Well, when you put it that way, I’m quite happy not being normal.

Comments

  1. I think there’s a bigger picture here which is long term goals. My first thought when you asked “can you afford a $40K car” was , “hell, no!” Even though I could write a check tomorrow for that car and still have plenty of cash left over. Why? Because I have other things I want and need to do with that money.

    I’ve never had a car payment, I don’t have cable at all, and I don’t belong to a gym, so I get that part of what you are saying. But the rest? I think you are mixing up ongoing bills and choices about where to spend your money. No doubt my New York Times subscription costs me well more than the $16/month I pay for it. But I choose that payment because getting it makes my life better. I am happy to pay my gardener monthly because they do the very small and very big jobs I don’t have the time or inclination for. That payment frees up my TIME which is more valuable to me than anything else. With that time I can work more (I am self-employed), or I can have more leisure.

    Ongoing expenses aren’t a waste if they are part of a planned budget. Similarly a cash on the barrel payment for a car can be a waste if you haven’t planned exactly how that $ will impact your overall financial plans. The key is looking at the long term picture.

    • Diane, you make several very good points. We may be mixing an affordability argument with an argument over how people value their time and money. Like you, I’d much rather pay for certain services than do them myself because I value my freedom. Unless I just particularly enjoy doing something myself, I’d rather outsource it and focus on other things.

      However, if that outsourced thing represents too much of my budget I may grow to resent the expense, in which case I will probably do it myself and learn to enjoy it!

  2. I have to agree with your basic premise, Jason. A person generally knows what they can afford. I love Diane’s point, too. B/c when I tell myself “We can’t afford this” what I’m really saying is “We have better things to do with our money long-term.”

    • It really is a great way to view affordability. I try not to use the phrase “we can’t afford it” around my kids for this very reason. It’s important for them to understand that even though the money is there, we have more pressing needs/goals/desires for our money that that particular thing at that very moment.

  3. I like your idea of converting monthly costs into yearly figures. It can show you how something that seems insignificant can really add up. Maybe on paper you can afford something, but every penny you spend on one thing is one less penny towards something else. Having a different perspective of what something costs you each year can easily persuade a person to save the money instead. And that is something that will be much more beneficial down the road. Thanks for sharing your idea!

  4. We recently cut the cable cord and the feeling has been great. We miss a few shows that aren’t found for free on Netflix, Hulu, or the internet but we’re still alive and well… I like the idea of imagining paying for a years worth of services, membership, etc.. all at once. All of sudden that cheap gym membership takes on a whole new feeling when realizing a year costs into 4 figures. No thanks, I say.

  5. My goal was to retire by 50-accomplished at 48-FICO was 830-no debt-retirement fully funded >3million- i am currently 52, monthly expenses $1,300.-two homes, an 80 acre farm, and three vehicles paid for in cash, except second house; i paid off 30 yr mortgage in 18 months-no late payments on any bills-fast forward 18 months; one bank states i have no FICO but will loan me up to 500k if i put up my farm for collateral-other bank, where i had the mortgage, will not loan me any amount without an acceptable co-signer- i asked for $5k- and states my FICO is too low-i do not need a loan-i am doing this solely to improve my FICO-i followed all the advice of being debt free, pay with cash, etc.-i still pay all my bills on times and have no debt, but now i am not credit worthy-what advice do you have for me and others in my situation?

  6. I like this post and it is very usable by many of us out there. However, the upgraded cable package is a bit off. My roommate pays $130 a month for cable. Yes that number is correct and I, personally, find it to be insane. I don’t pay any portion of it at all because I think he is crazy.

  7. This is a great question to ask yourself!

    Without budgeting and knowing what you can and can’t afford on your income, it’s all too easy to get caught up in finance deals, low monthly payments and seemingly low-cost membership deals.

    Before considering whether you can afford these additional luxuries, it’s a good idea to write up a realistic budget and make sure your monthly payments are covered (rent, mortgage, bills, previous debts…).

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