My brother is a gearhead with dreams of owning a airplane hanger full of Ferraris.* Even though it'll be some time until his dreams come true (as of this post, anyway), I half-jokingly pressed him to buy a used Porsche. After all, he could snag a pre-owned Boxster for maybe $40k. He chided my sarcastic suggestion by sternly asserting that he can't afford to buy one. I thought otherwise given that he can easily make a down payment and the subsequent monthly payments. For the next couple of minutes we went back and forth debating the issue of what it means to be able to afford something.
Since that conversation and after some chats with friends, I've refined my definition of affordability. When it's all said and done, you can consider something to be affordable if the purchase meets all three criteria:
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You have enough money to make the purchase without going into debt. As of a few weeks ago, this was my only definition of affordability. The criterion applies to pretty much everything save for traditional big ticket items such as a house, a car, or college.
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You aren't putting your overall financial health in jeopardy. Just because you can buy something outright without going into debt doesn't mean you can afford the purchase. If my brother had
$45k to his name and he wanted to pay for his Porsche with cash, he'd be left with $ 5k. My hunch is he wouldn't be in favor of such a move because the purchase would handicap his ability to achieve other goals, such as buying a house or generating a solid retirement base. -
You can sleep comfortably at night after making the purchase. Affordability is just as much about mental health as it is about financial health, and not being able to sleep at night is highly related to point #2. However, problems often arise when you don't know the ins and outs of your finances because you might make a jeopardizing purchase without knowing it's a jeopardizing purchase.
The only way you can truly know if something is affordable according to the above criteria is if you have a strong lens into your financial health. The first point can face pitfalls if you haven't looked at your bank account and use credit cards to spend through your money. The second criterion can't be satisfied if you don't know your financial situation and/or haven't clearly defined your goals. And the last point is moot for the same reasons as point number two.
For a comprehensive assessment of your financial health, head to your Dashboard where you'll find your Wealth Score and other feedback! For more information, check out our Dashboard information page or Wealth Score information page. And if you need some guidance, Moneyskope is always here to help.
Notes
*This is only slightly exaggerated.