Can You Afford It? Here's How To Find Out ...

Peter's picture

Have you ever been looking into making a large purchase, such as a house or a car, and asked yourself: Can I really afford this? If you haven't been tracking your expenses closely, this can be a difficult question to answer. If you don't have a solid grasp on your cash flow, there is still one way that you can figure out just how tight you'll be after making the purchase. It works and, in the end, it'll even save you money!

Can I Really Afford It?

Before I get started, I just want to say that you should be tracking your expenses and your income on a monthly basis. If you do this, you'll know whether or not you can afford something without too much effort. However, in reality, not all of us are on top of our finances like we should be.

If you aren't up to speed on your cash flow, you might find yourself wondering whether or not you can afford to buy a house or a car. Is that extra expense too much? It'll be tight. Maybe too tight. I should have a bit left over, shouldn't I? I earn a good salary. My other expenses aren't too high, or are they? It isn't always easy to say for certain.

Rather than taking a blind leap of faith into a potentially crippling financial mess, step back and see what life will feel like, financially, if you were to make that purchase.

Take A New Expense For A Test Drive First

An excellent way to see if you'll be comfortably able to pay for a new expense is to start making the payments before you actually incur the expense. I don't mean start paying the car dealership before you buy a car; I mean start setting aside a car payment each month to see how well you can cope with the reduced cash flow. You can do this with any new expense you're considering: a car, a mortgage, an upgraded cable package, whatever!

Figure our what the monthly payments will be after taxes and interest are tacked on. Make sure you include as many of the hidden costs as possible. These include things like:

  • Loan interest expenses
  • Additional insurance premiums required
  • Repair and maintenance expenses
  • Additional taxes (e.g. property taxes)
  • Additional utility expenses that you aren't currently paying (e.g. water, sewer, heating, etc) if you are buying a home
  • Gasoline expenses if you are buying a car
  • Etc ...

Also, you can subtract from this amount any expenses you wouldn't be paying after the purchase. These might include:

  • Rent expenses
  • Transit pass expenses
  • Etc ...

Then, once you've figured out how much extra you'd be paying, start setting that amount aside each month. You can put this money into a high interest savings account where it will be safe and it will earn you some interest income. Most importantly, don't spend it! After a year of making these mock car or mortgage payments to yourself, you should have a decent idea how well you are able to deal with the new financial burden.

If you feel you are coping well then you can use the money that has accumulated towards a down payment. This will reduce your total debt and its related interest charges. If you find yourself a bit too tight for money with the extra expense, you can easily decide to avoid the purchase altogether. You can then move the cash you've set aside into your retirement savings or leave it right where it is for use as an emergency fund.

A Closer Look

The beauty of this method is that you get to experience the feeling of making the additional payments without actually taking on a liability. If you had bought the house or the car and then discovered that the payments were too steep, you'd have to go through the ordeal of selling your purchase and facing the risk of not being able to recover the original price you paid.

The downside is that you don't get to have what you want now. You have to wait. This isn't actually a downside though. It's an upside. You see, by getting yourself used to not having everything now, you'll be better able to break impulsive spending habits and, as a result, you'll end up saving money. You'll also avoid taking on expenses that are beyond your means.

So next time you find yourself asking whether or not you can afford something, why not try living with the added expense for a while before actually making the purchase? It'll save you money regardless of whether you end up making the purchase or not. You can't lose!

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