One of the things I heard a lot when my husband and I were shopping around for a new house a few years ago was this: You can borrow this much!
This much invariably turned out to be more than we were strictly comfortable spending.
One lender (specializing in no-doc loans for the self-employed) was even prepared to approve us for a mortgage loan with a payment that would have amounted to about 42% of our monthly income. This was in the heady days just before the mortgage market crash and the financial crisis.
I wasn’t entirely sure I was ready to buy a home, but I knew I wasn’t comfortable with a payment that large.
Home buying isn’t the only time you need to be guarded in your spending decisions. You might be told that you can “afford” a certain monthly car payment, or think that it’s easy to buy a brand new electronic device if you put it on a credit card and pay only the minimum payment.
Don’t Spend on Something Just Because You Can
Just because someone tells you that you can do something doesn’t mean that it’s the best option for you or your finances.
A good example is buying on credit.
Yes, you can buy a brand new, king-size Tempur-Pedic mattress for $5,000 if you put it on your credit card. However, if it’s going to take you 14 1/2 years (paying a 3% minimum on a 15% APR card) and cost you another $3,365.07 in interest, is it really worth it? What could you be doing with that money going to interest? How could it be benefitting you?
The same principle is true of making other purchases.
The mortgage lender might tell you that you can “afford” a certain payment, but what happens when the rate resets? What happens if your hours at work are cut, and being on the edge now means that you can’t afford the payment later?
You might be approved for a certain amount in student loans, but do you really need to borrow all of it? Could you get by with a part-time job and frugal living to reduce your total amount of education debt?
Even if you aren’t going into debt for a purchase, it makes sense to ask yourself whether or not you really should be buying something.
What will you use it for? How much will you use it? Do you really need it? Will it contribute in a meaningful way to your enjoyment and quality of life?
In many cases, we spend money just because we can, and not because it is advancing our own goals, or contributing to the life we actually want. Spending just because you can eventually leads to dissatisfaction with your finances and even with your life. Evaluate your spending choices, and get a handle on where your money is going and why.
Evaluating the Value of Your Spending Decisions
Before you make a purchase, whether you are buying airplane tickets or a new house, it’s a good idea to evaluate the value of your spending decisions.
What are you getting out of your decision? Here are some questions that can help you evaluate the value of your spending:
- What happens if your income is cut?
Ask yourself if you are on the edge. If you are stretching yourself to “afford” a payment, you probably can’t truly afford it.
When we first bought our home, I admit that I was a little uncomfortable because the payment was 1/3 of our income. However, I also knew that the home was modest, and that it would be possible to cover, for a couple of months, if my freelance income were cut. I’m glad for the modest home now, because the payment amounts to less than 1/6 of my income as of this writing. With my husband’s income, I could lose half my clients and still comfortably pay the mortgage. Think about where you would be if you lost some of your income.
- Will it add to your quality of life?
Consider how much the purchase will add to your quality of life. If you really enjoy experiences (like I do), buying expensive stuff might not be worth it.
Why do I want a 60-inch TV like my neighbors if I’d rather spend the money to go on a trip somewhere?
Think about what’s important to you, and focus your spending on the most important items. Just because you can buy something doesn’t mean that it will contribute meaningfully to your life.
- What else could you do with the money?
Think about what else that money could be doing.
In the bed example above, you can probably think of other things you could do with the interest paid, rather than just putting the money into someone else’s pocket. You could invest the money, save up for something else, do something with your family, or pay down high interest debt.
Think about what else you would do with the money, and whether it would be to your advantage to use the money for something else.
In the end, only you can say whether a purchase is “worth it.”
But don’t be swayed by arguments that you can “afford” something, or that you “can” buy something. Instead, think about the consequences, and figure out what impact the purchase will have on your life and finances in the long run.