One of the most important questions you should ask yourself before you make a purchase is this one: Do I have the money for that?
Many of us neglect to ask that question. Or, if the question is asked, we assume we have it — even if we don’t. Before you decide you can “afford” something, you need to take a step back and determine whether or not you actually do have the money.
Will Using the Money Take Away from Something Important?
The first thing you need to do is be honest about the impact of the money on other areas of your financial life. If you are spending the money on one thing, there is a good chance you won’t be able to spend it on something else. Consider your financial priorities, and ask yourself whether or not you are giving up something of long-term importance so that you can have something superficial right now.
Do you have to reduce your planned retirement account contribution in order to buy that new game system? Are you skipping your extra debt payment this month so that you can go out to an expensive dinner? The real test is if you have the cash after you’ve already paid for all of your obligations and more important expenses. If you have to give up something that is truly important in order to “afford” something that is less important, you can’t really afford it. Consider what you are gaining vs. what you are giving up before you make the spending decision.
Where is the Money Coming From?
Maybe you decide that all of your important efforts to reach long-term savings goals can be met. Now, you want to buy something “fun.” There’s nothing wrong with this. But, before you pull the trigger, be honest about where the money is coming from. A few years ago, I was convinced that I was living within my means because we weren’t adding very much new debt, and I paid more than the minimum on my credit card balances.
When I became honest with myself, however, I saw a pattern: I occasionally moved money from another account to “shore up” the primary checking account. Sometimes, I bought two or three things with the credit card. Even though the overall trend was toward paying off debt, the efforts were hampered because sometimes I “cheated” a little bit to make sure I had the money to meet expenses.
Look at where the money’s coming from. If you truly have the funds, I have nothing against spending money for the things that you like. However, if you repeatedly have to move $100 or $250 from your emergency fund to cover costs, or if you don’t pay off your credit card balance “just this month” in order to avoid depleting the checking account, you aren’t living within your means. You don’t actually have the money for the purchase. You are just shifting things around, and using a little bit of debt to mask the problems.
Consider where the money will come from, and be honest with yourself. Consider saving up for what you want, and then buying it when you truly have the money.