Take a moment and think back to the last time you picked up a coffee on your way to work or stood in front of a vending machine deciding on a snack. Were you asking yourself if you could afford this purchase? Of course not. Sure, dropping a couple bucks on a fancy coffee may not be the best use of that money, but you already know subconsciously that buying it won’t break your budget or alter your financial security this month and beyond.
Now think back for a minute and look at a larger purchase that did give you pause. It could have been that forty dollar dinner out, a new TV, or even a video game. Did you think about whether or not you could afford it? Did you make justifications as to why even though it wasn’t in your budget you could still make it work? Unfortunately, if you’re asking yourself these questions, the reality is that you truly can’t afford it.
Affordability = Opportunity Cost
When you’re asking the affordability question, what you’re really debating is opportunity cost, even if you don’t realize it. That’s because affordability has to do with deciding whether or not making a purchase is worth what you have to give up elsewhere. When you buy a two dollar cup of coffee you’re not faced with the affordability question because you already know that aren’t really sacrificing anything elsewhere (unless you’re deeply in debt, buying the coffee on credit, and only lying to yourself, but that’s another discussion).
When it comes to a larger purchase and you begin to question if you can afford it, you’re really debating whether or not that purchase is worth what you will be giving up. What you’re giving up isn’t always obvious. Sure, you can put a price tag on it and know that’s how much it will cost, but your subconscious is factoring in things like how it will affect your retirement saving goals, how it will mean it takes longer to pay off credit card debt, how it means less money saved up for college, and so on. Even though you might be just thinking about the money in the bank while standing in the check-out line, all of those factors and more are what is going through your head even if you aren’t thinking about them specifically.
Affordability is far more than wanting to buy something that costs $200, seeing you have $400 in your savings account, and telling yourself you can afford it. I’m sure you’ve seen this many times yourself, where you clearly have more than enough money set aside to make the purchase without hesitation, but you still find yourself questioning whether or it’s a good idea. That’s because something in the back of your mind is telling you that it might not be truly affordable. Even if you can’t put your finger on why, take that as a mental cue that you should step back from the purchase for now and reassess it.
Affordability Relies on What Ifs
As you talk yourself through the affordability question it is framed around today, or the status quo. You tell yourself that as long as your life continues how it is right now, you can surely afford it. But the real question surrounds the “what ifs.”
- You lose your job or receive a pay cut?
- Insurance premiums go up?
- There’s a financial emergency?
- The stock market tanks and you lose a lot of money?
- Insert any unexpected thing here…
How many times does life chug along perfectly without any bumps in the road? Almost never, so if your telling yourself that you can afford something now, only to know that if any of the what ifs were to happen you’d be in trouble, you’re only lying to yourself. If something was truly affordable you’d know that the decision to make that purchase wouldn’t adversely affect you.
Would you regret buying a two dollar coffee last week if you lost your job today? Of course not, because those two dollars wouldn’t even make a dent in that loss of income. Would you regret buying a $2,000 HDTV last week, depleting much of your emergency savings, if you lost your job today? You better believe it. If you bought that same HDTV last week but used funds specifically set aside for it and still have three months worth of expenses in your emergency fund and then lose your job, how would that ultimately affect you?
As you can see, it’s not what you buy or what might happen in the future. It’s what you buy and how well you are prepared for the future, and knowing what you’re giving up by making each purchase. You can buy luxury items if you aren’t robbing Peter to pay Paul. But if you get that feeling in the back of your mind telling you there are other priorities to take care of, it’s time to listen, even if your bank account balance is making it look like it’s easily affordable.
The Affordability Acid Test
“If you have to think about whether or not you can afford it, you can’t.” Use that as your affordability acid test with each purchase. If you go to buy something and the thought of whether you can afford it or not never even crosses your mind, then chances are it’s truly affordable. But any time you find yourself thinking about whether you can afford it or not, even briefly, STOP. The mind works in mysterious ways and it is trying to tell you something. You may not visualize a bunch of flashing lights or bells going off telling you that you can’t afford to rob potential future retirement savings, or that the money really needs to go towards credit card debt, or that something unexpected may be in your future, but if something is giving you pause, stop and listen to what it is saying.
Many people think that this strategy means you can only buy stuff if you have a bunch of cash sitting around. That’s not exactly true, nor is it the point. The point is to think critically about what you buy, and more importantly, understanding exactly what making that purchase will take away from other areas of your finances. It’s good to know that if you buy something today it may negatively impact you in the future, but it’s better to know exactly what it will impact and how so you can take the steps needed to make up for the shortfall.
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Filed Under: Personal Finance
About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.