Beating Broke

Personal Finance from the Broke Perspective

How Do You Define Affordability?

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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.

All I want for christmas...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

Would You Be Better Off Single (Financially)?

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There are, undeniably, some benefits to being married.  Both financially, and otherwise.  But, are there benefits to being single as well?  Would you be better off single?

One of the biggest financial benefits to being married is the ability to have two full-time incomes coming into the household.  Using both incomes, we have the ability to save more money for retirement and for emergencies.  But, we’ve still got to have the ability to see each other once in a while, so we have a limited ability to extend our work hours to increase our incomes.  Being single, you have the ability to work 10-12 hours a day, and increase your income through overtime, or through a second, after-hours job.

Together Time 106/365As a single person, there’s no arguments over where the money should go, how much of it to save, or whether a person can survive on a diet of rice and beans.  Frugality can be taken to extremes that are usually off limits to the married.  Want to live in a one room shack with limited heating and cooling because you’re at work more than you’re at home?  If you’re single, you can do that.  Being married, especially if there are children, makes that a near impossibility.  Want to take up a bike lane living lifestyle?  In North Dakota?  If you’re single, that’s probably possible.  Married?  With kids?  Think again.

Being single also helps you save money.  There are no Valentines gifts or anniversary gifts needed.  Why buy a fancy bedroom set when a mattress on the floor will do the trick?  Your dining out bill is easily cut in half, or more, since you don’t need to eat at those fancy restaurants. Taco Bell and Dominos will do just fine.

Without the restrictions on your time, you have free rein to do what you want, when you want to do it.

Are you single?  Are you better off financially than you would be if you were married?  Are you married?  What do you think?  Would you be better off, financially, if you were single?

photo credit: SashaW

Do Politics Have Any Place in Personal Finances?

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First, this is a personal finance blog.  As such, I try very hard to not comment too much on politics and keep them out of my articles.  But, should I?  Do politics have a place in personal finance?  Do our financial beliefs have any bearing on who and how we vote?  Should they?

I think the short answer is yes.

Whether we like it or not, politics and politicians play a significant part in how our finances play out.  The laws and regulations that they enact have the ability to cause widespread change in how we earn, spend, and save money.  Some examples:

Hoovervilles: 1932 Do-Nothing EconomicsPolitics Changes How We Earn

Recent legislation has raised the minimum wage so that many of the workers who were making minimum wage are now earning more per hour than they were before.  The legislation, in effect, gave many of those workers a pretty big raise.  Of course, the opposite can be true where many companies, feeling the pinch of having to pay that much more per hour, were forced to reduce hours or the number of workers causing some to make less than before. Temporary reductions in payroll taxes have added dollars to our paychecks.  Proposed changes to Social Security could change that again, and could change the way retirees earn their SS funds back.

Politics Changes How We Spend

The most obvious example of how politics can change how we spend money is taxes.  The tax rates that we pay, both federally and locally, can cause us to spend less on some items.  They can also cause us to spend a bit more when we receive a refund each year.  Another good example is the recent legislation that changed the way interchange fees work and caused many banks to raise fees to compensate.  Instead of compensating, many of us moved our accounts to Credit Unions that weren’t charging the new fees.  State sales taxes can drive sales across borders, especially when a bordering state has no sales tax.  Tax credits and deductions have caused millions to be spent on home improvements, energy efficient appliances, electric and hybrid cars, and even the birth of children.

Politics Changes How We Save

Regulations and laws determine the methods of investment for most every investment vehicle publicly available today.  With each new legislative session, new regulations and laws are passed that affect how investments and savings vehicles are able to operate and function.  Any new scandal, like the recent Madoff Ponzi scandal, or the less recent Enron failing, causes a flurry of new regulations and laws that are meant to prevent similar situations from happening, but also result in increased administrative costs that get passed down to the investor.  Tax incentives for certain retirement savings accounts cause added funds to be added to retirement accounts as a tax shelter.

I don’t think that there’s any doubt that politics and the politicians that play them play a huge part in our personal finances.  The laws and regulations that they enact each session make changes to the entire financial field.  Especially in the last few election cycles, there’s been a lot of focus put on the economy as a whole, and how the recent slump has been caused by this politician, or that politician.  There’s lots of blame going around, but in the end, I think it took a concerted effort by a bunch of folks.

As this election cycle heats up with local primary elections this spring and the presidential elections in November, I urge you to take a good look at who your choices are, and inform yourself on their stances on ALL the important areas of your life.  Too often, we look at a politician and judge them based on just one of their platform stances.  “That one is Pro-Choice! I can’t vote for him”.  I think that’s a mistake.  You’re unlikely to find any politician that agrees 100% with all of your views.  Find one that agrees with the most of your viewpoints, and vote for that one.  If you don’t know where they stand, find their campaign website and find out.  Contact them if you have to.  But, educate yourself before you blindly go into the voting booth.  The worst thing you can do is vote based on a gut feeling, or vote blindly without knowing who you are voting for.  Your finances may depend on it!

photo credit: Tony the Misfit