People use the term all the time when making purchases. “I can afford it, so why not?” they say as they sign the paper work for a new car, a new house, or swipe their credit cards for that fancy new television. But, can they really afford it? How do you define affordability?
Like many of you reading this, I’ve often defined affordability by whether I can make the payment or not. It was while reading The Millionaire Fastlane that I read a passage that made me rethink how I define affordability. The passage was this one:
Think about the last time you bought a pack of gum. Did you fret over the price? Did you ask, “Hmmm, can I afford this?” Probably not. You bought the gum and it’s done. The purchase had no impact on your lifestyle or your future choices. To a rich man who walks into a dealership and buys a six-figure Bentley without thought, the acts are the same.
Affordability is when you don’t have to think about it. If you have to think about “affordability,” you can’t afford it because affordability carries conditions and consequences. If you buy a boat and resort to mental gymnastics over affordability, YOU CAN’T AFFORD IT. Sure you can assuage affordability and make outlandish arguments, often starting with “I can afford this as long as…” […]
This self-talk is a warning that you can’t afford it. Affordability doesn’t come with strings attached. You can bluff yourself but you can’t bluff the consequences.
So how do you know if you can afford it? If you pay cash and your lifestyle doesn’t change regardless of future circumstances, you can afford it. In other words, if you buy a boat, pay cash, and are NOT affected by unexpected “bumps in the road,” you can afford it. Would you regret a gum purchase if you lost your job a week later? Or if your sales forecast was slashed by 50%? Nope, it wouldn’t make a difference. This is how affordability is measured against your level of wealth.
To overcome wealth impersonation, know what you can and can’t afford. There is nothing wrong with buying boats and Lamborghinis if you can truly afford them. There is a time and a place to indulge.
Reading that, and taking it to heart, it completely changes the perspective on what you can and cannot afford. I have no problem affording the pack of gum, but I certainly couldn’t afford a boat. In truth, I think it’s a bit of an extreme example, but one that we should probably strive for.
Think about some of the more recent purchases you’ve made and whether, using Demarco’s definition of affordability, you could really afford them or not. I know that, if I use that definition, I certainly couldn’t afford the new (to me) car we bought a year ago. The house we almost bought before I quit my job was absolutely out of our affordability range. On the other hand, the new Blu-Ray player we bought to replace our dead DVD player was affordable, and, with kids, somewhat necessary.
In a way, Demarco’s definition of affordability matches up quite well with the cash-only lifestyle that many try and live. If you can’t pay cash for it, you can’t afford it. It’s a personal goal of mine to someday be able to live my financial life in that way. I’d like nothing better to purchase our next car with cash. Or, our next house. Will it happen? Realistically? Probably not. But, it’s a goal, so we’re working towards it.
What about you? How do you define affordability? Does Demarco’s definition make sense to you?
photo credit: Tom Wolf | Photography
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Reading that passage makes me think of the line sales people like to use at upscale shops: “If you have to ask how much it costs you can’t afford it”.
The way I see it, everyone has to come up with their own formulas and definitions of affordability (and anything else money-related for that matter). Some people may view affordability as having the means to acquire something such as the boat or the Bentley. Others like Mr. Demarco have a more strict definition of the term. The important thing is that people do what works for them in their particular situation, and not worry about what others say or do.
Personally, I don’t really think of affordability so much when I buy things as much as I consider if that money would bring me more utility or pleasure if used another way. I’ve grown into a more thoughtful spender in my “older age”, and my lifestyle is always evolving until I find that perfect formula for me, so what may impair it today may not necessarily impact next months lifestyle.
I can afford anything I want, but I realize it is a matter of choice. I choose not to buy a new car or a bigger house because it would mean I have to give up something else.
To me affordability is a question if a given purchase will still allow me to accomplish my long term plans. I think that my long term plans will be negatively impacted by a given purchase…….. then it is not affordable.
What I do usually is ask myself then my hubby if that thing or things we want to buy are needed. If that is something that we or the kids need to survive, to develop or enhance skills, to save in the long run … etc. Because it it is something we direly need then we would save up for it or buy it then and there if we have the money. We canNOT afford to have it – specially if it has to do with the kids development. But if we just “want” something, we cannot afford it if we have to sacrifice one thing or another to have it.
@Eric But, isn’t that a form of affordability? If you can’t afford to spend it on that one thing because it would give you more utility or pleasure elsewhere? Perhaps there’s a scale of affordability.
@Krant In a way, I think that was Demarco’s point. To him, affordability is the ability to buy something without having to give up anything else. (besides money)
@Juan I think that’s the major takeaway here. If it causes some deviation from your long term path, it’s probably not as affordable as you think.
@Reese Again, I think it depends on your definition of afford. Can your children’s development afford for you to not buy that item? Maybe it doesn’t fit directly into Demarco’s definition, but there’s a line where some things that are necessary (truly necessary) have to have the definition fudged a little.
It is a very good point he makes, but I don’t agree completely. I can afford a Starbucks latte, but it doesn’t mean I can go out and buy one whenever I want (I actually don’t like Starbucks, just an example). Although the latte is certainly affordable, the money spent on it would have better utility used elsewhere. For larger purchases though Demarco does have a valid point.
That is a pretty strict definition of affordability but it could work for many people. I used to sweat even small purchases. I’ve loosened up since then and know that as long as the big picture is good at the end of the month I don’t need to worry about every little purchase.
If you are buying something and not giving it a thought then you are familiar with that purchase and you know that you can afford it. I hear some people that are on a tight budget say they can’t afford things all the time, they probably could, but the budget they are trying to live by says that they can’t afford it.
I find it funny when athletes get find 10G for a penalty or saying the wrong thing. That is like fining me $50 bucks. 10 grand sounds like a lot to me but their affordability is much higher.
For me, it’s more about not accumulating “stuff” rather than a measure of affordability. For instance, I can afford to get both a laptop and a tablet, but then it would mean having both laying around the house. I would rather work out which one would work best for me and choose that option as opposed to buying both and the result being having more clutter than I desire.
I read that article in Demarco’s blog and kinda disagree with his thinking. I get what he is saying and his main points but I don’t think that just because you think about the cost means you can’t afford it. I mean, I think about the costs of things can afford all the time. I’m just that way. I thought about he costs of having the neighborhood kid walk my dog while we were on vacation but that doesn’t mean I can’t afford the $2 per day he was charging. 🙂
If I were to go strictly by this definition, I could never afford to buy a house. I agree with Allison that the definition is a little skewed, although the basic premise is rather good.
For the average person, I believe that some debt can be good debt. A home mortgage is a good debt as long as you continually budget for the payments and your DTI is rather low when you go into the purchase. But if you apply his basic premise to the mortgage, buying a cheap starter home with as much cash down as possible could be a good compromise.
“Would you regret a gum purchase if you lost your job a week later? Or if your sales forecast was slashed by 50%?”.
YES. I’d regret every non-essential purchase over the past year, probably. And I have. That’s why I’m frugal today — I found myself lacking in funds, and I looked back over all the money I’d spent while I was gainfully employed with few financial obligations, and it HURT.
I understand the point of his definition but I don’t think it’s really feasible for everyone. Like another commenter pointed out, if I followed that, it would take me a very, very long time before I could afford a house. On the other hand, I do think of other things in terms of, “Could I pay it off now and still be fine?”
For example, I got personal training for a year at my gym. It’s $120 a month for 12 months and yes, I gave up a house cleaning service to get the personal trainer (same price). However, if I wanted to, I could pay it off now ($1440) and be fine but I’m choosing to pay it monthly. Does that mean I can’t afford it?
I would say that being cash only is a great way to go. But most people will never have enough to buy a house.