Can I Afford That?

by Khaleef Crumbley on April 20, 2011

in Loans

Can I Afford

Can I Afford That?

I’ve been forced to think about this question a lot lately. If I have to borrow money in order to pay for something, can I afford it, really? If I have to borrow $30 to buy dinner for my family or even $300 to get new brakes, doesn’t that mean that I can’t afford it?

If you are thinking about spending $3,000 for a new flat-screen TV or $30,000 for a new car, but you have to borrow the money, that means that you are probably not in a good financial position to buy those items. In other words – you can’t afford it!

It’s really not that hard of a concept to get a hold of. If you do not presently have the money to pay for something, then you can’t afford it! In case you are wondering, my view of this doesn’t change with a mortgage. Borrowing $300,000 to “buy” a house, means that you can’t afford that house right now!

I know that people will talk about all the benefits to having a mortgage (pride of ownership, tax deduction, and even using it as a debt consolidation loan), but to me those are secondary issues that take away from the bottom line.

If you don’t have the money to pay for something and you have to borrow money (and pay interest) in order to buy it, then you can’t afford it! This is a simple concept, but many people will file for bankruptcy in the near future because they couldn’t get a hold of it. Many of us will continue to borrow and spend – hoping for unrealistic salary increases, asset appreciation, and even government intervention to bail us out!

I feel I must make something clear at this point…I do not have a problem with someone who has the ability (read: money) to pay for something outright, but they are purposefully incurring some debt because they are using their cash for investments from which they stand a reasonable chance of earning more than they are paying out in interest. Trying to leverage your money in order to wisely increase your investing gains is something that can be analyzed, calculated, and managed (of course, that doesn’t mean there aren’t risks involved).

What I am talking about is the constant need for everything to be financed in this country! You can finance a house, car, education, stove, sofa, computer, and practically anything else that you wish to buy. This means that people no longer look at whether they can truly afford something, but only if they can get by with monthly payments!

The biggest problem (besides feeding an already unfettered since of entitlement among most people) with all of this is that all of this debt is backed by depreciating assets (cars, furniture, electronics, etc) or things that no longer have any value (such as meals, old clothing, vacations, and a worthless degree in a subject you’ll never use)! Most people are not even in a position to sell their assets and pay off their debt!

In order to overcome this, we must learn to live below our means and think about more than our immediate desires! Debt consolidation is only an answer once you have taken care of the real problem! The same goes with any other type of hardship program or bailout you may receive.

In the end, it takes a change in thinking to stop this epidemic.

photo by renjith krishnan

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{ 12 comments… read them below or add one }

1 Living Simplistically

Thank you for your submission to A Carnival for Saving and Making Money hosted by Living Simplistically!

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2 JoeTaxpayer

I continue to follow these comments and wonder one thing – If one were to save for the house to pay in full, what would the result be? Lower demand for sure, as currently any new worker entering the system is now a potential buyer, and they’d need to wait some years. But really I’m thinking if the house savings meant holding off on retirement savings till at least age 30, would you ever catch up? No, I don’t believe houses are “good investments” per se, it just appears to be a given that it’s on people’s want-list. I suspect there are too many variables to reach a definitive conclusion, obviously house price, interest rate, increase in stock market are the main variables. I may attack this specific math problem for an article of my own, I don’t know what the results will suggest.
I still maintain, and I’d like the readers here to consider, that when your current rent is enough to pay for your proposed mortgage, that’s about the right crossover when one can look at the purchase as being reasonable. Of course, if you pay half your income to the rent, there’s a problem. I mean the normal 25% or so number, a week’s pay.

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3 CreditDonkey

Great post! True enough, if you’ll have to borrow in order to buy something – it only means you can’t afford it. Live within your means.

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4 Brad Harmon @ Marketplace Christianity

That’s a great question, Khaleef. It reminds me of something Jim Rohn used to say. He used to complain about prices being to high until his mentor pointed out that the problem wasn’t the price it was that he couldn’t afford it.

We’ve come to a place where it seems a failure to admit you can’t afford something. Instead of asking how we can increase our worth to the point we can afford it, we have become a nation of debtors settling for the servitude debt brings with it. Once we feel the full wight of this oppression upon us, we rail against those who lived within their means and increased their net worth.

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5 DIY Investor

I disagree on the house. Saving $300,000 will take a long time. The interest you earn is taxed etc. Taking a mortgage gives a nice tax break and an appreciating asset if done right. It was one of the best investments I ever made: tax breaks, asset appreciation, and place to live where I could do what I wanted.

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6 Mark

I agree with that concept. If you have to borrow to buy it then you cannot afford it.

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7 optionsdude

There does need to be a change in attitude in this country. Few people get an appropriate education in these matters. It used to be, 150 years ago, that most individuals were small businessmen and learned how to manage cash flow and expenses. Children were made part of the family enterprise from an early age and learned by doing. With industrialization, many moved into cities to work for larger employers and children were instructed in public institutions which did not have a direct interest in financial management. Now here we are a few generations removed and no one has a clue.

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8 Kevin Yu

As my good friend told me, “Learn to live poor”

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9 Living Frugal

Most people buy things that they know they can’t afford. That is the reason why society is the way that it is today.

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10 Kevin Yu

They are trying to keep up with the Joneses !

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11 krantcents

I agree with many of your points, however I take exception with mortgages. Real estate is an investment and it generally increases in value. If you wait until you can pay cash, you may never be able to buy it. Buying real estate has been over time a good investment and it is subsidized by the federal government as a tax deduction. You still need to pay the appropriate price (value) and finance it at a good rate. Last, pay it off as quickly as reasonable. In the end it is an asset.

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12 JoeTaxpayer

I like this article, and agree to a point. When it comes to a mortgage, the numbers point to the need to finance. I wrote a simple spread sheet (linked from my name) to show how much one should have saved in comparison to their income, e.g. If I have a million dollars saved, but am 60 and was earning $250k/yr, it’s a far different story that if I’m 45 and earning $100k. In fact, at 45, I’d be on track to replace my income by retirement time.
Now, if we accept that buying a house valued at about 3x one’s income is common, you’d need to save 15%/yr till your late 30s to get there, all the while struggling to save for retirement as well.
It’s less about interest savings, etc, than the fact that you get a return from the house, imputed rent. So a conservative approach I hear too little about is to do the math, and see what your rent will buy you in mortgage power. When you have the downpayment and see that the rent you pay can cover property tax and the mortgage to buy the house, that’s when I’d say it makes good sense. From that point, the same inflation that increases the rent also increases your pay but decreases the value of the remaining mortgage balance. Of course, buying is a decision much larger than this, but it’s also bigger than the fear of borrowing.
I see people financing furniture, I tell them to sleep on the floor or sit on crates till they can afford it, but a house? Different story.

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