It is one of the most basic questions of personal finance. But have you ever thought about what it REALLY means to answer the question “Can I afford it?”
Do you just look at the balance in your checking account? Or do you go with your gut? Is it okay if the monthly payments aren’t too high? Or do you just see which credit card still has room? Or, if you are a very frugal person, maybe then no matter what the answer is “no!”
These are some of the ways people try to answer this question, but none of them really get the job done. That is because the only way to TRULY know if you can afford something is to take your whole financial picture into account.
What is your “whole financial picture?”
It is very easy to think of our finances as just bills and spending, because those are the things we interact with the most. But our whole financial picture is more than just that. It should always include these five things:
- Bills (this includes debt payments)
- Spending
- Occasional/Annual Expenses (vacations, holiday spending, home repairs, etc.)
- Emergencies
- Future You
Ignore any one of these things, and you run the risk of getting into some real financial trouble. Why? Because emergencies do happen, holiday spending comes every year whether we like it or not, and you will actually get old one day. Any question about what you can or can’t afford has to include these things.
But how does this work in real life? To answer that, here are six mistakes that people make when trying to decide if they can afford something, and what you should do instead.
Six mistakes people make, and what to do instead.
Mistake Number 1: Going by your checking account balance.
Dave’s favorite band is in town, and he sees that concert tickets are only $500. He’s already paid his bills for the month, so he looks at his checking account and sees that he still has over $500 left. “Great!” he thinks, “I can go to the concert!”
The problem:
- What you have in checking is only one small part of the picture. What do you have in savings? Is it enough to cover an emergency? How about a job loss? Or should you be saving that $500 for a big expense next month that you aren’t thinking about right now? Do you have debt that you are ignoring? And what about future goals like retirement?
If Dave keeps spending everything in his checking account then the first time he has something big come up a credit card will be the only option. If he stays on that path the debt will keep growing, and soon he will have a real problem.
The solution:
- He needs to look at the bigger picture and make sure that all five parts of his finances are covered, and not just look at what is left from his last paycheck. Educating himself on personal finance and budgeting, or a few sessions with a financial coach like me, can help him do that.
Mistake Number 2: Going by feelings instead of numbers.
Tanisha is pretty responsible with her money. She has an emergency fund, a vacation and Christmas fund, and she puts 7% of her paycheck towards retirement. One night she finds herself doing some shopping on Amazon and before she knows it she has $700 worth of stuff in her shopping cart. She knows it’s over her budget, but she feels like she hardly ever buys anything so she doesn’t worry about it.
The problem:
- Our feelings don’t always match with reality. People often “feel like” they hardly ever go out for dinner, or hardly ever order delivery, or hardly ever buy stuff on Amazon. But if they take the time to add up the numbers they can see a very different picture. They may find out they are spending a lot more in these areas than they thought.
The solution:
- Look at your actual spending, not just what you think it is, before making your decision. A budget app can help with this. A lot of banks and credit cards also have features that can help you track spending. Not the app type? You can also just look at your monthly statement and add things up, you can save receipts, or track spending on a calendar, or in a journal.
Mistake Number 3: But I deserve it.
Look, I think everyone deserves all the good things in life. But whether you deserve something and whether you can afford something are two different things.
The problem:
- It is very easy to look at what our parents had, or what our friends or neighbors have, or even what influencers on social media have, and think that we should have the same things. But you might have a completely different financial situation than they do! You might live in a different area, have a different job and family situation, or might just be at a different stage of life. And they may not be showing you the whole picture. They may be in debt up to their eyeballs, and financing everything with credit! You just don’t know.
The solution:
- You have to base your financial decisions on the reality of your situation, not on what people around you are doing, or on what you think you “should” be able to afford. That doesn’t mean you can’t work to change your situation so that you CAN afford all the things you want. But in the short term, reality is what you need to deal with. Look at what you have, and come up with a budget that works for YOU.
Mistake Number 4: Not including the total costs.
Eduardo’s new apartment is right next to a bike path. He hasn’t owned a bike since he was a kid, but he’s excited to make biking part of his life again. So he looks at his finances and comes up with a budget of $300 for a new bike.
He finds a great bike for $299 … under budget! While he’s at the bike shop he also gets a bike helmet ($75), a bike lock ($30), lights for the bike ($25), a patch kit ($10), a tire pump ($30), a new windbreaker ($55) and a bell ($25). All together, along with the 10.25% Chicago sales tax, the total is $605.27. He leaves the store wondering how he managed to spend twice what he thought.
The problem:
- How many times have you said to yourself, “wow, that cost more than I thought it would!” Often that is because we don’t stop to think about all the costs that are involved. Even something like a free ticket for a play can cost money if it means going out for dinner beforehand, getting drinks afterward, and maybe taking a taxi home.
The solution:
- When deciding if you can afford something, always take time to think about all the other costs that come with it. Then make your decision on the total cost, not just the cost of the original item.
Mistake Number 5: Only looking at the monthly payments.
Elizabeth wants to go on a $2,000 vacation with her friends to Belize. Money has been a little bit tight lately, and what savings she had went to an unexpected dental bill. But if she puts the trip on her credit card the payments will only be $60 a month. She can easily afford $60!
The problem:
- Looking only at the monthly payments can fool us about how much something really costs. At 29% interest and $60 per month that vacation will cost $4,115 … twice the original cost! And she’ll be paying on it for over five years. During those five years other expenses will come up and she’ll have $60 less each month to deal with them. More and more things will probably have to go on the credit card, and she could get into a dangerous situation.
The solution:
- Elizabeth first needs to prioritize re-building her emergency fund. She also needs to create a fund specifically for occasional expenses like vacations. If she really wants to go to Belize, maybe she can bring some additional income. If she can earn enough to rebuild her emergency fund AND pay for the trip without carrying a balance on her credit card, great!
Mistake Number 6: Being afraid to say yes, I can afford it!
Dante went through a long period where he was really struggling with money. Then his career took off, he started saving and investing, and now he has extra money in his budget each month.
But he still finds it hard to spend money. At the grocery store he buys the on-sale apples even if he likes another kind better because he saves $1. He knows he could afford to hire a cleaning person, but couldn’t he do that himself for free? He’d like to visit his sister in Portland, but have you seen the price of airline tickets?
The problem:
- When our financial situation changes it can be very difficult to change our lifestyle to match it. This can be true for when your income goes up and when it goes down. Our lifestyle can be part of our identity, and we are asked to step out of that, it can feel like we are changing who we are.
The solution:
- A starting place for Dante would be looking at his total financial picture and letting those numbers help him see how doing things differently might fit into his new finances. He could also work with a financial coach, or even a therapist, to help him think about how he might like to change his lifestyle to match with his new reality.
How to know your total financial picture.
If the only way to answer the question “Can I afford it?” is to know your total financial picture, how do you do that?
One way, of course, is to do some financial coaching sessions with me. My initial coaching package is inexpensive, and in those sessions we will go through your finances, look at your total financial picture, set priorities for your finances, and then create the systems and new financial habits you need to make those things a reality.
You can also just sit down and look at your own numbers. Add up your bills, add up major expenses coming up, figure out what you need for an emergency fund, and make sure you are putting something away for retirement. Subtract all this from your income, see what you have left for spending money, and then make adjustments from there.
Some reading on personal finance can also help. Two books that I like are Ramit Sethi’s “I Will Teach You To Be Rich” and Erin Lowry’s “Broke Millennial: Stop Scraping By and Get Your Financial Life Together”.
Interested in trying financial coaching?
If you are ready to stop stressing about money, and start getting in control of your finances, I offer affordable rates and a free 30-minute intro call. Coaching is done over video calls, and I do not sell financial products, just practical solutions to help you answer the question, “Can I afford it?”
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