In one of our dreaming moments during the weekend, Emma and I jokingly spoke about joining a private golf country club. It was brand new, relatively close from where we live and also extremely nice.
The financial commitment to enroll were:
- $30,000 to join (although that can be negotiated down to possibly $20,000 we heard) and 90% of the current initiation fee can be refunded when we decide to leave the club so we can theoretically even make money on this
- $475 monthly dues
So when we talked about whether we could afford it or not, the first reaction from the two of us were YES. Maybe its not so much of a dream anymore because:
- We can get our initiation fee back
- $475 a month is something we could come up with
Think Harder to Stop Wasting Money
Although we could come up with the monthly payment and hence we could “afford” joining, it obviously wasn’t a very sound financial decision for us. Here are a few reasons why:
- We Still Need to Buy a House – We already have a sizable down payment for our house, but we should make sure we borrow as little as possible when we actually make that purchase. It would be unwise for us to spend excessively right now and then take a larger mortgage payment.
- Our Life is Still Ahead of Us – Not only do we have plans to get a house, there will be additional expenses in our lives once we raise children and grow our family.
- Expect the Unexpected – 2 months ago, no one could imagine the Dow Jones Industrial Average losing 30% in a short few weeks but unexpected events like these happen all the time. Throwing $20,000 into an illiquid asset is not the best way to prepare for emergencies.
Thinking About Affordability is Why So Many Americans Are Poor
I have so many friends that think about nothing but whether they could come up with the monthly payment at the time of purchase. Just today, my coworker was telling me that his friend is paying $650 a month on his car lease. His friend probably didn’t do this but if he takes out his calculator and do a little math, he will realize that he is actually paying $100,000 for a car that’s worth $40,000.
The simple and common example above illustrates the danger of thinking about affordability. Think about all those stories you hear of people who’ve accumulated massive wealth because of their frugal lifestyle. These people don’t buy that new gadget or new car because they don’t see the need, not because they can’t afford it.
A Couple Other Points to Consider Other than Affordability
Despite affordability not being a good sole reason to buy something, it is still something we should consider. On top of that, here are a couple good questions to ask ourselves when we believe we should buy.
- Is it necessary or is it nice to have?
- Is there a more economical version?
- Would most people in your situation want to buy it?
- Would you still buy it if you had time to think about it? In other words, is it an impulse decision?
- How is that going to affect your short and long term goals?
Mind you, I’m not saying that everything you buy have to be necessary. If it is Emma’s birthday, I wouldn’t hesitate to get her a birthday cake even if it’s not something I will say is “necessary” for our survival. So just use these questions to challenge yourself to think through every buying decision.
Your Turn
If all you thought about was affordability before, try to broaden your thinking because it will help you keep more of your money. For others that are already experts at this, what’s your secret? How do you determine what to buy and what not to buy?
{ read the comments below or add one }
Things such as college, a home, a reliable vehicle (when needed for business especially) are things that I am more than willing to finance, but I agree in the fact that we should limit the amount of debts. If you have an offer for high interest debt, unless someone is dying or some TRUE emergency, I suggest trying to limit debt as much as possible. But there are clearly times when debt can help, as long as the terms are worthwhile and the reason for the loan is worthy.
I try to distinguish between a true need, and a luxury item. That way when I spend on luxury, I know it, and I can save more when I don’t have to spend as much. Also, step away from a purchase for awhile, a week, a month or even a year to see if you still really want it or need it. Never forget that even when a deal looks amazing, it is still an expense.
A free tip for downsizing a wardrobe:
When I take inventory of my belongings, I ask myself, would I buy this now? If not, I take it to Good Will.
My husband go through this all the time and I thank you so much for putting it into words for me. I say we can’t afford it but my husband will say we can. The truth is, we often can afford it but it would not be wise. This has given me a new perspective on how to discuss with my husband about how he is right about us being able to afford some things but how it may not necessarily be a wise decision.
I noted that several people drive 9 year old paid for cars and have mixed feelings about the image projected. I also drive a 9 year old paid for car. It is comfortable and has high safety ratings. It still looks pretty good-ongoing parking lot dings seem inevitable though. To do this is one of the best financial decisions most of us can make. Also experienced friends suggest that if you are contemplating a very long road trip it is wise to rent a new car for those occasions. That way you do not have to worry about a breakdown, an expensive tow and the difficulty of finding repairs in a timely way in a strange city and perhaps being very much taken advantage of-or sometimes not-many people are honest. Even if doing this might cost a few hundred dollars for a week or longer it is still so much cheaper than the average $25,000 cost of a new car, financing and state registration and taxes plus higher insurance costs.
If people stop to actually calculate whatever purchase they are trying to make at the moment, more times than not, the purchase will not be made. Your example of the car note of $650/month for a $40,000 vehicle will cost you a total of $100,000 if you keep making those monthly payments. The point here is do your research and make wise decisions. Thanks, Luis
Great stuff. The trick is distinguishing the difference between needs and wants. Affordability is only really the primary factor for needs.
Following my post: http://moneyning.com/money-beliefs/are-you-rich/comment-page-1/#comment-91202
Many times in life, I’ve found that to just spend it if you have it where it’s a major need, is the best way forward. In other periods, I’ve found to keep a good grip on the income/outcome, and save every bit you can helps in the longer run. The “emergency fund” idea is a good one I’d say.
I buy 90% of my stuff used (clothes,furniture,dishes,etc) and make extremely frugal purchases for new things. People are shocked by this – “you have college degrees and a good full-time job! You don’t HAVE to do that! You could afford better.” My question is why wouldn’t I buy used? It’s cheaper, greener (reduce, reuse, recycle my friends), provides me with a wider variety of product, gives me access to better-made retro versions of products and leaves me $$$ to do other things I enjoy. Because of this I have no credit card debt, aside from an interest free for 12 months payment on my washer, which is also an example of not getting “what I can afford” -i.e. making a higher payment just because I can squeeze it in. I got a super high rated energy efficient GE washer for $500. It wasn’t a fancy color or cool looking, and most people aren’t going for top loading models now. However, the closest priced front-loader with equally good ratings was $800; the really fancy ones, with metallic colored finishes and 1000 settings, were even more! The fact is I don’t NEED my washer to be pretty. I just need it to get the job done and be very cheap to run. Great article.
Consumer spending is what drives the economy. Here is also another perspective/inspiration to be frugal: the less we buy/consume, market demand falls — which will send a signal to decrease the supply (or price) of hyper-inflated goods. This is as environmentally friendly a consumer can go because resources are getting scarcer. When we spend unnecessarily, we spend at our future generations’ expense.
The problem is that retail therapy and the idea of buying prestige is gloriously addicting and fun… minus the credit card bill and compound interest that comes later. Product placement is getting much cleverer — with all the new TV shows, combined with social media. Being happy is learning to live within our means and put away 33% of our annual salary away in emergency funds. If we can’t strive towards putting a desired % target of our earnings, then we’d need to re-evaluate our spending habits.
DIY: If we can’t afford the expensive small items, maybe we can learn to make it ourselves, as long as it is cost-effective — i.e. learn to sew, garden, cook; etc. It is much more fun and fulfilling.. to develop various personal skills! After investing time & experience, everyone would be bugging you for samples.. and you could potentially start a side business or barter system. 😉
Rentals? I’m not sure how the public libraries work in the USA, but Canadian public libraries have a massive collection of CDs, books, X-Box games, movies; etc. It only costs us $1.50 each month for two people and we can borrow up to 40 items each time.
When it comes to major expenses, I ask myself “What do you actually need?” For example: Do you need a car? No, I need the use of a car. So, I joined a local car share cooperative in my city. My total cost, for my level of useage, comes in at under $1000 a year. And one of the local perks is a discount on monthly bus passes. My current challenge is impulse purchases of under $10. It’s the minor purchases that put me off track!
I’ve never been to a bar, I’ve never actually been an imprudent singleton so I’ve never had a chance to develop that spending mentality. I don’t feel that I am missing out on anything by being frugal.
For any purchase over $50.00 I write it down and let it sit for awhile. This year in my house my wife and I purchased a new 42 inch flat screen TV. I could always have afforded this but we waited over a year to purchase it. Our old TV cost only $100, it was small and we had no way to play any media in H.D.
When we finally decided to buy the new T.V. we set a cash budget for $500. After visiting over 4 stores and asking for discounts we got exactly what we wanted for $400.
I believe that it has provided actual value to us because the picture is big enough that my daughter enjoys watching educational T.V. Also for myself I can now watch HD (which I download many good documentaries for free). This keeps me in the house more and paying no money for outside entertainment. Also I have no cable T.V. as we download so much material and I can hook my laptop into the T.V. and watch youtube.
So all in all we waited a year and now some 8 months later we have had quite alot of added value to our lives and I believe that having the TV actually saves us money compared to other entertainment options. And we payed in cash so no debt.
I agree, I`m trying to put that way of thinking in my kids mind, over and over… I always have a rough way when it comes to Christmas … My kids ask :’oh, but the neighbors have the brand new ( Wii, PSP, whatever the videogame is), why can`t we have one?’ or ‘Mom, you CAN AFFORD an Ipad, why don`t you buy one?`’ And the answer is ALWAYS the same: ‘Kids, there are needs and wants… what do you REALLY need? and what do you JUST want?’ then we all together make priorities and surprise! (well, not for me 😉 haha) the videogames and Ipads, brand new generation Ipods and all that stuff go to the last of the list. 🙂
I do what a previous poster seems to do as well, I multiply monthly fees by 12 to find the annual cost. My friend’s $19.99 Blockbuster subscription, which is $240 a year. I wouldn’t feel comfortable paying that amount upfront, so I’m not going to throw away that much monthly either.
Sometimes I catch myself doing it on the little things too. I was thinking about mailing a bill in rather than paying online, and I multiplied the stamp cost by 12 to discover it would cost $4.50 over a year. Haha, okay, I can afford that, but I’m glad that I’m focused on cost-savings to the point that it’s funny, rather than carelessly paying $20 a month on useless junk. That’s no laughing matter.
If only so many people could have taken this advice to heart before so many poor decisions were made about how much house one can “afford”! We have a rule in our house that in addition to discussing any purchase over $100, we have to sleep on it. Amazing what a night of sleep can do to your perspective on what you really need.
Jewelsmom,
In my area there is a basic $10/month gym, large with pretty good equipment and with a Curves-style workout room. Exercise is good for you and you could save money without giving it up.
When my husband and I first got married he had all these little monthly payments for luxuries. Every time he mentioned one, I’d tell him, disapprovingly, I’ll admit, “That costs X amount a year.” He said, “You take the joy out of everything.” But, now we talk about whether or not these things add value to our lives. We’re trying to maximize joy instead of minimizing it. Some things you can live without so you can get something that makes you happy.
The twin brother of “Can I Afford It?” mentality is “I can’t afford NOT to buy it.” I read some online deal sites and it’s very common to see someone post a good deal for some retailer, and dozens of people jump in to say they bought one and how happy they are to get it cheap.
You can’t save money by spending money you didn’t need to spend, no matter how good the deal is. If someone is offering a gizmo for 50% off, and I wasn’t in the market for the thing in the first place, why would I suddenly want it just because it’s cheaper? Some of these people are “saving” themselves right into ruin.
Wow. These are some expensive Gyms. I belong to curves, it cost me $36.49/mo and I am kicking myself each month that it is debited directly out of my account. I used it for 6 months and then gave it up… too boring and the staff stood around talking to customers endlessly. I like to work out alone, in my own zone, it’s not social hour for me. Next month is my last payment on my membership. I am looking forward to freeing up this money to put away into savings. Won’t every join a gym again.
I know exactly what you all mean. A year ago I joined the fanciest and most expensive gym here in New York. The movie stars use that gym. It is a very nice and expensive place. My membership expires next week. Do I need to rejoin? I don’t think so. After discovering this website yesterday, I decided to pay $1,000 towards my credit card and make an effort to pay it off as soon as possible. I will look for inexpensive gyms next time around. I really do not need to join such as expensive gym.
And about the lure of advertising….. Disconnect the TV and the magazine subscriptions…. sooooo little advertising will get into your life 🙂
Luv it.
Fascinating how many people think. I think its the basic fundamental thinking that is embedded in everyones back of their minds. What is not right and what is right. Todays society projects a way of living to the public that creates and distorts out way of thinking. Picture a world with no advertisement. Now for those of us that want to succeed financially. It’s simple. Educated yourself on the true powers of advertising.
I agree with the skewed thinking of affordability. Back in high school, my friend and I got into shopping for deals. We knew how to find the best sales and the best bargains. Unfortunately, such single-mindness resulted in a closet full of clothes that I don’t really enjoy. I bought many item simply because they were relatively cheaper. This is the pitfall of affordability. Just because something is affordable, certain doesn’t mean it is a bargain. Good post David.
PFAD – Totally agree. The whole “Secret” and “abundance” thinking is great and all, but maybe we need to dial back what we consider “abundance” – and compared to most of the people in the world, the fact that you have a car AT ALL makes you wealthy.
I don’t like to make those comparisons often (the “hey, it could be worse” ones) but darn it … we’re kinda spoiled.
Drifting off-topic, probably …
Robert Kiyosaki says that saying “I Can’t Afford It?” immediately shuts off one’s brain to the possibilities that saying “How Can I Afford It?” allow for. While I prescribe to his thoughts, I think timing is also an important part of this process. There are many things we cannot afford now because we choose to get out of debt, buy a house, and have an emergency fund. Once these are taken care of then we can “afford” alot more even if we’re making the same money.
As far as cars, we haven’t had a car payment in over 10 years and cannot imagine living any other way. A friend got in my car the other day and said “Does the odometer really say 251,009 miles on it?..” Yep and I plan plan on driving it until at least 300K. If you don’t have your “self worth” tied to cars and other things, life is so much cheaper.
I think people fall into this trap with the “I deserve it” mentality. Then can afford it and they deserve it so they do it. They never bother to think that they deserve a good retirement and only they can provide that for themselves. You deserve your salary for working (most of the time) but you don’t deserve to waste money on crap you don’t need at the cost of your future financial security.
The thing that makes me mad is that these people all think they need to be bailed and that it isn’t their fault that they’re in financial hardship.
Susy,
I like the idea you pointed out that people “deserve” the money they work for but don’t deserve to blow it on stuff they don’t need. I just started working after graduating college and being a student/stay at home mom for 15 years. So, after not having 2 nickles to rub together for so long and now that our income has doubled, it’s hard to not want, want, want. But the statement you made really puts it into perspective. I deserve a better life, but that doesn’t mean the nicest clothes, car, house etc. It means less stress, and a nice retirement. So thanks for the insight.
Might I add, and respectfully so, what I dislike about your post is that, while helpful, there is a condensending tone. You end it with your disdain for those who feel the need for a bailout. That’s understandable and there are plenty of people like that, but not everyone is. You state “these people ALL think they need to be bailed out…”. Well, I, for one, gave you an example of a person who fell into the trap of “I can afford”. But I am not one of “these people” that you speak of. I am trying to teach my children (and myself) better financial habits than I was taught. It’s not that my family had bad financial habits; my dad was the sole worker and my mom kept their credit ratings A++, but their shortcoming was that they never sat down and TAUGHT it to me. It was taken for granted that I would learn it. Now that I’ve been through the struggle, I know to actively teach my children better. So, all of us who have financial trouble are not looking for a bailout, etc. Some of us work our butts off to get into a better situation, like graduating college while pregnant with 3 kids. We all make mistakes. What matters is how to dust yourself off, get up and try again.
“Never look down on someone unless your helping them up”.
Just the past couple of days, similar thoughts have been going through my head, as I related in On being prepared. I think many of us are too quick to spend and too slow to save. I’m just as guilty as the next person, many times, but articles like yours really helps me to refocus on what’s needful. Thanks.
I like what you wrote, I have the same problem and trying to rid the need to spend instead of save. I am learning how to put things into action and not just saying it. It is hard but I have to break the cycle of trying to impress or make people feel that I have it, because I do not. My children future is more important than the quick fix.
This post brought up a lot of feelings. A friend thinks I drive a “pile” (car). This car is 9 years old and has never had any major problems and it looks like most of the other cars on the road. It was paid off years ago and I have peace of mind. My prior car was a really nice car that I could afford in the beginning. I had to borrow money from my dad when I quit a higher paying job (long commute) and took a lower paying job (no commute) and couldn’t make the payments. Life felt oppressive until this debt was paid off. A fun car to drive, but not affordable after all. Though I kept it for 17 years. Life is better without monthly car payments.
It’s sometimes tough to drive my paid for 9 year old car and feel like people are looking at me with pity, but it passes quickly as I remind myself that I really care about their shows of wealth about as much as they care about mine (hint: not at all).
So much of the “can I afford it” is really “can I impress other people with the fact that I can afford it” and as I was reminded this week when I saw a $7 MILLION home in the foreclosure notices, a lot of that is just smoke and mirrors.
Our own little “can we afford it” moment – we recently had a Lifetime Fitness franchise open in our town. This place is truly impressive, quite the hangout spot, but would cost us almost $200 a month to join vs the $17 a month we pay at Fitness 19. We actually thought about joining, but only in the context of “if we were going to forego a family vacation in return for having a year of dues at a place with a pool and gym and sauna, we could justify this.” We could afford it either way, still go on the vaca even, but in the perspective of whether or not it was worth trading off something else for it? Not so impressive. Many of my friends who are seriously on the ropes financially are members … desperately trying to prove to their “friends” that they’re doing OK. Why the desperation to keep up with the Joneses?
Unfortunately, the education system in the United States doesn’t teach kids how to avoid this pattern of though. Great article.
Of course I could afford to pay for it, but that’s not the point. Why Would I/should I spend my money? What else could I be doing with that money that would be more financially responsible? How much interest would I lose? How much would it really cost me in lost savings etc?
The money I would spend is not just sitting there doing nothing – it is making me money every second it sits in an investment, so it would “COST” more than just the purchase price. Would it be worth jeopardizing my retirement $$/ your house down payment/ someone’s savings/ a kid’s college money? What affect does it have on the future? Those are the questions I ask.
If it costs over $100 it goes on a list inside my kitchen cupboard door, labeled “Wants”… If it’s still there a year later, and if I still really want it, then I’ll buy it. Sometimes in the meantime tho I have found a free one, a gift from family/friend, a hand me down, or a great garage sale find on the same item. Or sometimes I’ve found an entirely different solution that works just as well – such as making it myself. I’ve gotten awfully handy with tools since starting on my house reconstruction 🙂
Now, I do make exceptions to this list – such as when major appliances break down and need replaced… But that decision has already been made in my head and is not really a ‘want’ so much. But it will be a ‘no frills’ version 🙂
That’s my method and it’s worked well for me. Sure cuts down on impulse buying.
I try hard not to fall subject to the ‘can afford the payment’ thought pattern. I did that with college and student loans, now I get to spend ~$1,100 / month in payments. I could have probably done just as well in a state school but opted for a private school. Ouch.
Try even harder to not fall into that trap. Now a day busiesses try to sale you there product that way. It is bad for the person that falls for that. There is a perfect example in the article about the person who is paying $100000 for a $40000 car. The sale person asked him howmuh can you afford to pay a month (trap). The customer said $650 and the the sales guy put that $650 into a frmula that = $10000. It truly bothers me when sales people try to sale me things on a monthly “affordable” payment, like I am stupid. I negotiate on the sale price and go from there. I control my down payments and my payments.
You were doing so well until you said “and my payments.” If you have to make payments on anything other than housing, then you can’t afford it. Buy something cheaper and save up until you have the CASH to buy everything outright. If you are making payments, you couldn’t afford it and are borrowing against future earnings that you simply hope you will have.
One of the questions I ask myself a lot (and tell other people) about certain purchases or outgoings is “Can I afford it?”
Sometimes people look at me funny when I answer.
Of course, I can pay for it, that’s not the problem. But can I afford it? Usually the answer is no.
Great questions to ask before making a purchase. I have to believe that most people buy products base on impulse and not reason.
In a way, I need to thank them because that’s what keeps the economy going.
Great post. I’ve always said: Just because you CAN, doesn’t mean that you SHOULD.