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

The Millionaire Fastlane

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The Millionaire Fastlane

By: MJ Demarco

If there was ever a case for a little less “hype-y” title for a book, this is it.  I’m not sure what else I would have named it, but the title just seems like a whole bunch of get-rich-quick hype, and it kept me from reading the book sooner than I did.  Which turned out to be a bit of a downer, since it’s really a good book.  Demarco spends about half of the book describing his ideas on the different types of life travelers.  There’s the “sidewalkers”, the “slowlaners”, and then, the “fastlaners”.  Each describes a way of thinking about how we travel through our life, financially.

The “sidewalkers” are the people who subscribe to a 9-5 work life and save as much as they can in hopes that they can one day retire on a decent budget.  The “slowlaners” are those that have started to break away from the 9-5 lifestyle and have some side income coming in, but they just don’t (or won’t) make the jump and get into the fast lane.  The “fastlaners” are those who have made the jump to business ownership, entrepreneurship, and are making their money on their own terms.

The second half of the book is dedicated to the “fastlaners”.  Demarco talks about the dynamics of earning money and how the way you make and spend your money is so important to becoming a “fastlaner”.

As someone who regularly writes about frugality, saving, and making the most of what money you do make, I have to admit that I was a bit off-put by the first half of the book.  There is a large contingent of the world that will work most of their lives, save for retirement, and then enjoy the rewards of having done so.  His arguement, of course, is that we shouldn’t have to work our lives away until we’re 60+ years old only to have our body break down on us and not be able to enjoy our hard-earned money in retirement.  Instead, he talks about becoming a “fastlaner”, and creating your own wealth so that you have control over your life and your income.

On the flip side, as someone who recently quit my job, and am trying to make a go of it as an entrepreneur, I really felt that I connected with many of the “fastlaner” ideas.  Going to college, getting a job, and working until you’ve got enough to retire on does seem like a long, fruitless pursuit.  Going solo and building something worth a great deal of money that enables you to retire early and live life the way you want to sounds a lot less long and more fruitful.  I think he makes a great point that many won’t be willing to make that jump and will, instead, settle for the “slowlane” lifestyle.

If you’ve ever given though to starting your own business, or are just unhappy with your job, I think this is an excellent book to read.  It’s inspirational in that it really gives a good idea of what is really possible.  Demarco comes across as someone who really is trying to help people out of the “slowlane” and into a “fastlane” mindset.  I think some will struggle with the concept, and surely, with the ingrained mindset that we’ve all been taught growing up, but seeing that, and beginning to break away from it are excellent steps.  Steps that will be helped by reading this book.