How Do You Define Affordability?
A TV commercial for a local credit union features people discussing finances at a “round table.”
One man comments, “It depends on how you define affordability?”
Huh??
Is it affordable?
Tanya sees a great sale on a designer scarf for $200. This brand almost never goes on sale and she just has to have it. She has budgeted $200 a month for clothing, so, she reasons, she can afford to buy it. Shortly thereafter comes the first big snowfall of the year and she realizes she should have bought new winter boots.
Related: Does your budget allow for overspending?
Trevor goes out for drinks after work with his office buddies. A couple of drinks turns into a whole night of spending on his debit card. He had planned to have a special celebration with his significant other, but has now blown the money he had set aside for it.
Max is retired and has put away a nice sum of money for up to three years of lifestyle expenses. He wants to splurge on a $250,000 boat. The problem is this will take a large bite out of his living expense budget. He would have to redeem some of his investments sooner than expected and this could impact his long-term plan.
You can argue that these purchases are technically affordable in that the money is currently available. However, they are not consistent with their goals, so really they are not affordable.
At this price you can’t afford not to
You are interested in buying a car. It used to be the car price was the cost of the whole car. Now dealers are pitching loans with bi-weekly payments. It sounds like a good deal and this amount is easier to rationalize into the family budget.
Related: What’s busting your budget?
That top-of-the-line convertible is only $400 bi-weekly. The quick acquisition high is soon dissolved, leaving payments for a long, long time.
Likewise, new homes now tend to advertise with monthly PI payments. “Only $1200 a month! That’s cheaper than renting!” they proclaim. But, is it really?
Final thoughts
A recent Manulife survey claims that roughly one-quarter of their respondents don’t consider their mortgage, loan payments and lines of credit as debt.
Have people tossed their Miriam-Webster’s and come up with new definitions of words so as to meet their own criteria?
Related: Why do we save?
In my mind, a purchase is affordable if I have the cash available and it fits into my financial plan and desired goals.
How do you define affordability?
Definitely agree with your definition of affordability. It’s only affordable if we have enough cash available, won’t impact our future finances, and the item is actually going to be useful in the long run.
Perhaps the definition of affordability should be expanded from linear to circular. While I may be able to readily afford a $250,000.00 yacht, are the ‘off-shore’ costs of the yacht where a higher minimum wage is not being contested by youth workers and the uncontrolled pollution from its construction is not constrained to stay within its construction borders being considered? And these are just two of the myriad issues that we need to consider when determining whether an item is affordable or not.
Opportunity cost as well as social and environmental costs need to be thought of. Just because you can “afford” something does not make it a “good” purchase.
My mother used to say, in many contexts, “Just because you can doesn’t mean you should.” Same applies here.
Waaaay too many people convince themselves something is “affordable” because they can handle the monthly payments. They never think about the long term consequences.
Something is affordable to me if it’s in the budget and I think it’s worth it.