What Is True Affordability?
Photo credit:
JMRosenfeld / Flickr During the past decade, lenders and the media had us believe that affordability simply meant qualifying to buy it with a loan. Of course, that era ended with dire consequences, so that can't be right. What is true affordability anyway? Can you spot it if you come across it?
The Dream House Lover
Sammy loves the ocean, and he is making a ton of money. In fact, he is going to make more than $1 million dollars this year alone. From what you just read, you'd think that he's one of the nation's richest right?
But not so fast.
Though he is debt free and saving money in a rapid pace, he doesn't have much to his name yet. You see, his business is just starting to pick up. While he can probably cash in $500,000 a year after taxes at this rate, it would still take him eight years before he amasses four million, the price of the home he wants to buy. "I can afford it" he thinks. Or can he? And when?
The Average Car Buyer
Whether leasing is a good idea comes up all the time. Most people who favor leasing will tell you that the numbers work out in their favor if they like to change cars every few years. Some will tell you that it even reduces their liability, because no matter what happens to the car, they are hands free after the lease term is up. Now, let's say that your take home pay (after taxes) is $5,000 a month. It would be reasonable to say that you can spend $500 a month on your car right?
But then again, what if, when time comes to change your house, you couldn't afford the one you wanted? What if I told you that if you chose to drive that used beater and never changed cars instead, you would have that extra $50,000 needed to afford that nice house? Was the car really affordable for you?
What I Think Is True Affordability
Of course, there are infinite examples and unlimited possibilities, so worrying about the future is useless, impossible, and most important of all, unhealthy. So what to do? When I think of whether something is affordable, all I worry about is whether I could afford overpaying for it. Whether it's a house, a car or a chocolate bar, if I could knowingly overpay for it because other factors outweigh the financial ones, I know I could truly afford it.
Just to clarify, I'm not saying that I would simply pay more for something because I didn't do my research. If I could get the same product somewhere else that's exactly the same, like a TV that's on sale at another store for instance, then it's unwise to buy it for a higher price. All I'm saying is that if a slight price fluctuation isn't going to be devastating, then it's likely that I can afford it. Otherwise, it's simply too expensive, and I should work harder to make more money if owning it is that important to me.
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Great post! Classifying our needs and wants can be a challenge, and I'm surprised at how many people have a really tough time defining their "needs". It's easy enough to say, "I need a new car so I can get to work", and if you can afford the monthly payments, why not? But why not buy a car that is used but still in good shape, have lower payments, lower insurance costs, and have room to save up for that dream house or dream vacation?
I think when we ask if something is affordable it depends on if you are in debt or not. If debt is too high than I think that needs to be taken care of first before the purchase. I also thinking being too frugal can also be bad and more focus should be put on making higher earnings through passive income and other income generating techniques. Life is short and we should enjoy every moment and experience all we can. I think if you want something you make it affordable. There are many ways to do this.
A thought provoking question indeed. For each of us a truly introspective answer lies in a value system that has been built over time and not just recently initiated based on
the latest economic wind direction.
Thanks for your insight.
I posed this same question a couple of weeks ago to my wife and mother-in-law, basically stating that you have to factor in not only a comparison to like goods and available funds in your budget, but also some degree of opportunity cost to confirm that this good/service is in fact where you want to allocate your hard-earned money and thus whether or not something is truly affordable. I noted there was a big difference between being able to buy something by going into debt, being able to buy something without going into debt and true affordability. To which they responded that I was uptight and too tight with money. Good comeback. Great post.
The entire (or at least the majority) of the US economy or maybe even the worlds economy is base on people buying "stuff" that we don't really need. How do you reset (deflate) an entire economy to the point where people spend only on the necessities with the occasional slurg items. People need to put the majority of their money back into circulation-- ie spend it. Or else we're all out of jobs. The only thing I can agree with is don't spend it before you make it. We are a debt ridden society and have already spent the next 10 yrs worth of income.