With holiday shopping in full swing, I suspect over the next few days and weeks many people will be standing in store checkout lines asking themselves, “Can I Afford It?”
The “It” could be a Christmast gift, a new car, or a gift for themselves. Regardless, there will be a lot of mental number-crunching going on.
Some Thoughts on Affordability
Over the years I have come to loathe the very question of affordability. 99 times out of 100, if you have to stop and ask if you can afford something, you probably cannot afford it. Why do I say that?
Because affordability has been so mangled by marketers and creative financing that few actually stop to do a logical calculation.
Think about it…if I asked you if you could afford a new $40,000 car, what would your response be? What if I asked if you could “afford” a $500 monthly car payment. Chances are more would respond in the affirmative to the second question.
The new car deal offered is really the same. What you don’t consider is that by taking on the 84-month payment plan, the car will really cost you $43,000 when you add interest payments (even at today’s low financing rates).
People have been conditioned to think in monthly terms. Subscription fees, membership dues, car payments, and a host of other expenses are presented in monthly terms.
If you have a gym membership and they sent a letter reminding you it was time to renew with a bill for $359.40 you would probably call to cancel. But what about $29.95 per month? Sounds more palatable, doesn’t it?
One of the best exercises I can recommend to help gain control of your spending is to convert monthly expenses to a yearly cost. It will immediately help you gain perspective that a monthly bill just doesn’t provide.
Here are a few examples from my own household pre-financial turnaround. You can guess the things I immediately cut to help jump-start our get-out-of-debt plan.
- Gym membership. $29.95 per month. $359.40 annual cost.
- Lawn treatments. $42.50 per month. $510.00 annual cost.
- Expanded cable package. $80.00 per month. $960.00 annual cost.
Rather than guessing, I’ll just tell you that we cut all three of these items, and in the process saved over $1,800 that year – which just happened to be the lowest balance on one of our credit cards. In theory, we eliminated that debt simply by eliminating those three expenses, and our lifestyle didn’t really change that much.
Signing Up for Lifestyle Servitude
In addition to considering financial costs when questioning affordability, there should be other considerations when evaluating large purchases.
The fantastic book by MJ DeMarco, The Millionaire Fastlane, refers to a phenomenon called Lifestyle Servitude, whereby we erase more and more of our freedom by creating lifestyle debt.
Here’s how DeMarco describe the vicious cycle of Lifestyle Servitude:
1. Work creates income.
2. Income creates lifestyle/debt (cars, boats, designer clothes).
3. Lifestyle/debt forces work.
4. Repeat…
Sound familiar? How many of you have traded freedom for affordability? Yeah, me too. But part of maturing, financially, is being able to recognize that giving up our freedom for affordable payments is not a game worth playing, long term.
I don’t often wish for financial mulligans (except for the opportunity to go back and save half my income), because I am who I am largely due to how I’ve managed (or mismanaged) my finances in the past. The best lessons are often learned the way. However, if I had it to do over again, I’d love to start with a clean slate – no income, no payments, no debt.
As my income increased, I would not burden it by adding payments for things I really could not afford. I would save, pay cash, and continue to enjoy the freedom to move from place to place, or job to job, without worry over continuing to make payments for my stuff.
I would carry this philosophy into car and home purchases, and any other large expense in my household. If I couldn’t afford to pay cash for a new home, I would rent. If I couldn’t afford a new car, I’d buy a cheap, used one.
If I could not easily afford to cover a year of expenses, I wouldn’t add any new ones (cable, XM radio, gym memberships, etc.). How much different would life be had we taken that path when just starting out?
Sounds radical doesn’t it? Not quite normal. But what is normal? I’ll leave you with yet another great quote from The Millionaire Fastlane:
“Normal is waking up at 6am, fighting traffic, and working eight hours. Normal is to slave at a job Monday through Friday, save 10%, and repeat for 50 years. Normal is to buy everything on credit. Normal is to believe the illusion that the stock market will make you rich. Normal is to believe that a faster car and a bigger house will make you happy.”
Well, when you put it that way, I’m quite happy not being normal.
