How do you determine what you can and cannot afford? Here are some answers I’ve heard:
- I call the bank. If the money’s in there, I can afford it. If its not, I can’t.
- People with good salaries can afford whatever they want. People with bad salaries can’t.
- I buy everything on sale.
- I look to see if I have room on my credit card.
- People who have nice things – a nice car, live in a nice neighborhood, have a good education – they can afford expensive stuff.
One of the biggest money myths we have in our society is the belief that people with more money can afford things and people with less money cannot. Think about it. If you make 100K a year, drive a fancy car and live in a nice house, your money will probably be going to pay for the car and the house. Realistically you can have less money in your pocket after paying all your bills than someone who makes $10 an hour, takes the subway to work and lives with his parents.
However, most of us don’t look at all our expenses when trying to figure out what we can afford. We look at our income, our assets, the item we want to buy, the amount of money we can borrow, our mood or feeling at the time, and other things that have nothing to do with issue.
How do you determine what you can afford? You do the math! You add up all the money you plan to make and subtract all the money you plan to spend. The amount left is what you can afford to spend. Does that sound simple? It is, but most people I know have no interest in doing this. In fact, a lot of people are downright terrified to do this.
Many of us have a pretty good idea what we plan to make, but how are you supposed to know what you plan to spend? Well, keeping track of what you’ve spent in the past is a huge indicator in determining what you’ll spend in the future. But many people not only don’t like to track their spending, they don’t want to. But if you’re ever going to know what you can afford, you have to know what you’re going to make and what you’re going to spend. Some people call this process creating a budget (aaarrgh, I said a scary word!).
Our society is pretty much designed to not encourage people to think this way. Most of the money we loan to people is loaned without asking anything about their expenses. We ask people what they make, what they have, we look at their credit, and then we give them more money and stuff. Whether they can afford to pay us back is assumed. We assume if someone has a lot of money, they can afford to have more stuff.
This is exactly why we're in the economic crisis we are in today. We need to stop looking at income and assets as a basis for what we can afford. We need to teach people not to be scared to track their expenses. Only then can we expect to get out of this crisis and not return!