Just Because You Can Spend More, Doesn’t Mean You Should

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?

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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

afford to spend

Just because you are told you can afford more doesn’t mean you should spend more!

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.

Finally

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.

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Published or updated October 25, 2012.

Comments

  1. Too many people increase their spending when they start making more money and that’s how people get into trouble.

  2. Great advice! We were pre-approved for a $300,000 loan, and technically we could have afforded that, but I am very happy that we are staying in the $250,000-$260,000 range instead. It’s worth it, but so is peace of mind.

  3. It’s so refreshing to read a post like this! I am a huge HGTV watcher and whenever I see people talk about (and go over) their new home budgets, I often wonder how much of their income will go to the monthly mortgage payment. Even when looking for a new apartment with my fiance, there were very nice places at the very top of our budget. I didn’t feel comfortable choosing them because they were going to eat up too much of our income. So we finally chose a smaller apartment that doesn’t have everything we want, but costs half the amount. That means we have more money to save for our future together and that means more to me than a super-nice apartment we can barely afford.

  4. I’ve found it best to set your own price boundaries before you begin shopping. That way you don’t get sucked into buying more than you can afford on something with more bells and whistles. You definitely need to figure out the optimal mortgage payment before you try and get approved for a loan.

    My wife and I went with a mortgage about 66% of the size of the one we were actually approved for.

  5. Jenna, Adaptu Community Manager says:

    Great blog post. Definitely good to consider the long term cost, interest, maintenance, etc. of a purchase before making a final decision. Thanks for sharing.

  6. Something has to be really really important for me to have to put it on credit. I think a house and a 0% interest loans are hopefully my only credit purchases from here on out.

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