Afford is a tricky word. Many people think of how much money they have available in their wallets or checking accounts and believe if they can pay for it at the time, then they can afford it. Purchasing something on a credit card with the mindset that you can meet the minimum payments each month is reckless spending and isn't worth taking up any more space in this post.
A better option for weighing affordability would be to consider what else you could do with this money and how it could have helped your retirement savings or other long term goals.
- If you are not contributing to your investments on a regular basis, then you cannot afford as many frivolous purchases as you may think.
- If you are already contributing the maximum amount to your 401(k) plan, but do not have an emergency fund with six months of expenses fully established yet, then this should take precedent over any "wants".
- If your children's college fund is not on track to reach your goals, then you can afford less than you think.
- If you have a credit card balance that you cannot pay off each month, then you should not be spending any money on non-essentials.
- If you do not set aside money for future home repairs (or current repairs that are overdue), then you may be setting yourself up for a shortfall in the future when these expenses hit. Keep in mind that the repairs (i.e. repairing rotting wood, painting, new roof, and new gutters) will be necessary eventually and allocating some money each month or quarter toward the upkeep of your house is vital to the long term sustainability of your home.
Affordability comes down to prioritizing what is most important to you. Eating out at fancier restaurants, having a nicer car or a bigger TV is worth delaying retirement for some people. Others don't realize the damage they are doing by misunderstanding what they can afford. For example, if your friend asked if he should forego making IRA or 401(k) contributions to buy an iPad and accessories for $900 he might think it was not such a bad trade off. After all, it's not even $1,000. You could counter that the trick is his $900 could be worth more than $15,000 by the time he reaches retirement age if he is under 35 years old. That iPad might cost him an extra three to four months of work. Then again, if he's buying an iPad instead of contributing to his retirement account he isn't likely to reach retirement age ever.
The easiest way to be sure you can "afford" something is to understand what is at stake. Once your basic financial needs are covered, the fun spending can start taking a larger allocation of your monthly disposable income. Taking this path will also create much less stress throughout your life since money will be available when it is needed, whether it's due to a loss of a job, sickness in the family or just decay on your home that cannot be prevented.
