When you are shopping for a new item, a car, an appliance or even a house, if I were to ask you if you could afford the item, how would you answer? I’m not asking for you to tell me yes or no, you can or cannot afford it. Rather I want to know why you think you can or cannot afford it.
For example, if you are buying a car, how do you know you can afford it? Odds are if you are like most people, you base your answer on the monthly payment. If this is your answer, this could be a major reason why you aren’t further ahead financially.
Determine If You Can Afford It
You hear commercials all of the time talking about how you can afford large expenses. Most times, if not all, the narrator will simply tell you they have many financing options to fit any budget. This is a red flag that you can’t afford it if you have to go down the road of financing said item.
Now, I am not saying if you choose to finance an item, you can’t afford it. I don’t know anyone that can buy a house outright with cash. Likewise, there are few people that can buy a car with cash as well.
You have to look at the long-term cost, not the monthly payment to assess if you really can afford something.
How Figure Out If You Can Afford It
There are two steps you have to complete in order to figure out if you can afford something. Your first step at determining if you can afford something is to look at the monthly payment under normal terms. This means 30 years for a mortgage or 4-5 years for a car. Do the math or use the estimated payments on the mortgage rates  to come up with your monthly payment. Can you afford that amount?
If not, then you cannot afford the item and need to wait until you have more savings so that you can afford it. Don’t fall into the trap of a 40 year mortgage or a 7 year car loan just so you can get the house or the car. You will regret the decision sooner rather than later.
If you can afford the monthly amount, this doesn’t mean that you should buy it. This is because you really haven’t determined if you can truly afford it. You have to go to the next step.
The second step involves looking at the overall cost of the item. To calculate the total cost of a car , take into account the costs associated with it. These include:
- The price of the car
- The overall cost of interest (meaning how much you will pay in interest)
- The annual cost of insurance
- The cost of gas
- The cost of maintenance and repairs
There are plenty of resources online to estimate maintenance and repair costs. As for the others, you can work the numbers to get an estimate. Now you have to look at the overall cost. Can you afford that?
In many cases, that number is going to be an eye-opener. This is because we typically ignore the ongoing costs and only look at the monthly payment. This is what gets us into trouble. We think we can swing $400 a month but we ignore the $70 oil change and $1,500 in maintenance costs because it is a luxury car.
When it comes to a home, be sure to take into account the same things – maintenance, insurance, improvements, taxes, etc.
Even clothing needs to be evaluated. What are the costs for dry cleaning? What is the quality of the suit? How long will it last before you need to replace it?
All things have ongoing costs, be sure to take some time to figure out what they all are.
Be Honest With Yourself
At the end of the day, after looking at all of these costs, you have to be honest with yourself as to whether you can afford the item or not. If you are not honest, you just wasted your time because no matter what the numbers say, you are going to buy the item.
I know it is no fun going without, but it also helps when you ask yourself why you want the item in the first place. Do you really need it or do you just want it so that you can keep up appearances? When you get to the bottom of this question, you can be more honest with yourself.
In the end, don’t look at just the monthly payment to determine if you can afford something or not. There are other costs involved and these other costs are what get us into trouble. By taking the time to really understand the overall cost, you will be doing yourself and your finances a favor.
More Questions to Ask Yourself
- Can You Afford It? 
- 6 Questions to Ask Yourself Before You Make a Purchase 
- You Can Afford It… but Should You? 
- What Should Your Financial Pie Chart Look Like? 
- Are You Worried About Your Financial Future? 
- Are You Making Any of These Excuses For Not Saving Money? 
- Are You Focused on Today or Tomorrow? 
- Are You a Victim of Lifestyle Inflation?