Monday Motivation is a new weekly series bringing you motivational stories and encouraging advice each Monday morning to help you get your finances in order.
In many cases, we get caught up so much by what we can do that we rarely stop to consider whether or not it’s something we can afford to do. This is especially true when it comes to making purchases with loans. We think that being approved for an amount automatically means that we can “afford” it.
Approval vs. Affordability
When my husband and I began shopping around for a house, lenders approved us for mortgage amounts of more than twice what we ended up borrowing. Even though lenders were willing to let us have that much, we didn’t feel that we could comfortably afford to make the loan payments.
It’s important to understand that just because a lender tells you that you can do something, it doesn’t mean that you should. What you feel like you can afford shouldn’t be based on what someone else tells you can borrow. Instead, consider your individual situation, and whether or not you feel comfortable with what you will be paying.
This approach works for more than just loans; you can also consider true affordability whenever you make any spending decision.
3 Questions to Ask Yourself Before You Make a Purchase
Before you commit to a purchase, stop and consider whether or not you can truly afford it. Here are 3 questions to ask yourself before you buy something:
- Do I have the cash for this? Your very first instinct should be to determine whether or not you have the cash in hand for the purchase. If you have to pull out the credit card to “afford” your purchases, chances are that you can’t really afford it. When deciding on a mortgage or a car loan, think about whether or not you have the cash available to make the payment comfortably. You don’t want any payment you make to put you in a position where you are stretching to meet your other obligations.
- Is a special financing trick being used? One of the tricks used to make homes “affordable” prior to the financial crisis was the use of an interest-only loan. You could get a bigger mortgage, and only pay the interest for a certain period of time. Your payments were lower to begin with, and it seemed like the home was affordable — at least until it was time to start paying the principal as well. There might be other tricks used as well, such as no interest or payments for six months, or a teaser rate. You might even be using your own special trick, by moving money out of your emergency fund to cover a funding gap, or borrowing from your retirement account. Anytime you have to shift money about, or use a special trick to make something “affordable,” it’s an indication that it isn’t actually affordable.
- What will I have to give up? When you use your money on one thing, it means that you have to give something else up. Before you complete a purchase, ask yourself what you might be giving up. Will your purchase come at the cost of something more important to you? If you have to reduce your retirement account contributions in order to “afford” $100 more a month for a car payment, chances are that you can’t truly afford the car you are considering. Giving up a more secure future to fulfill a present want is an indication that perhaps you can’t afford that purchase.
Bottom Line
Conscious spending is key if you want to live within your means. Be honest as you make purchases. Really consider affordability. Giving up something important, adjusting your long-term financial goals, and “moving money around” are all red flags that indicate that something is, in fact, unaffordable.
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Monday Motivation – Can You Really Afford That? was originally featured on Quizzle Wire
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