Whether or not you’re a fan of Suze Orman or other financial experts, you’ve probably heard of her popular TV segment, “Can I Afford It?” On each episode of her show, callers ask permission to purchase items/experiences ranging from concert tickets to vacations to cars to second homes. Suze asks them a variety of questions about their financial situation and then approves or denies their request.
In many cases, your ability to afford a given item has nothing to do with the item’s price. If you are 55 with no retirement savings and up to your ears in debt, a $75 concert ticket might be a stretch even if you make $100k a year. On the other hand, even if you only make $40k a year but have no debt, healthy savings and a strong command of your spending, you may be able to afford a luxury vacation.
The point is you must consider your financial situation in its entirety before making a decision about one item. If you’re wondering if Suze would approve or deny your request, answer the following questions.
Do you have…
- A solid emergency fund? Before you even think about shelling out big bucks for a “want,” make sure you have at least 3-6 months of expenses stashed away in a high interest savings account as an emergency fund.
- Healthy retirement savings? If you want to retire comfortably, you need to be saving at least 10% of your income (including employer match). Before you consider a big purchase, make sure you have also amassed a suitable nest egg for your age. Translation: if you’re 40 and just starting, contributing 10% is not enough!
- Minimal debt? Suze usually wants you to have no debt besides a mortgage before approving a big-ticket item. If you have very low interest student loans that you are consistently paying on, you can still answer yes to this question.
- Get your money’s worth? Don’t purchase an item that you’ll use twice before wanting the latest model. Don’t buy into a vacation package if you can create a similar itinerary yourself. Don’t buy a house at list price if it was appraised for $40,000 less. Whatever the item that you’re trying to afford, make sure it’s a worthwhile use of your money, even if you’re rolling in the dough.
- Pay for it in cash? This is a biggie – if you’re taking on debt to buy something, you probably can’t afford it. When you identify something you want to buy, set up a savings plan well in advance of the target buy date. Exceptions: a house, NECESSARY education or transportation (not luxury cars!), or something you could pay for in cash but are financing at 0% instead.
- Curtail other spending? If you buy this item, are you willing to sacrifice a bit in the future, and let other wants fall by the wayside for now? If this one splurge is going to kick off a buying binge, you may not be able to afford it.
If and only if the answer to all six questions is yes…you can probably afford it! Of course this doesn’t necessarily mean you should buy it – but that’s a post for another day.
How do you decide if you can afford something? And if you want something and can afford it, do you always buy it?