How do you know if you can afford something?Chen Wan Lim
It is always tempting to buy the latest mobile phone or the latest car or even to go on the Europe tour a friend just completed. But, take a step back and ask yourself, can I actually afford this? With the easy financing options and credit facilities offered these days, it is technically possible to own things that are way beyond our means. But to delve deeper into the meaning of affordability, we will need to ask ourselves a few questions and to do a little bit of calculation if we really, can afford to buy something.
Is this a need or a want?
Before you determine if you can afford something and before you start crunching the numbers in your bank account, ask yourself this basic question: Is this a need or a want? Think about the pros and cons of procuring the new item or service. Determine if your one-year-old mobile phone is still working and that if you need the latest smartphone with 3-D photo capturing capability. If you come to a conclusion that the item you are looking at is a need, then you can proceed to determine if you can really afford it. But if the item is a want, then perhaps you might want to reconsider getting it in the first place.
Do you still have a credit card balance?
Once you have successfully determined if it’s a need or a want, then the next step is to crunch the numbers. Your day’s wages might be sufficient to pay for the item you want. But if you still have a credit card balance, then perhaps you can’t actually afford it yet as you will need to still stay in debt in order to purchase it. Try looking at other cheaper alternatives.
Will you be able to save after the purchase?
Assuming that you have been diligently saving a fixed percentage of your income every month, crunch the numbers once again and determine if you are still able to save the same amount after buying the item. If the answer is yes, then perhaps you can afford it. But if your savings plan is compromised, then try delaying the purchase or look for cheaper alternatives.
Borrowing to purchase
Putting aside large purchases like a home mortgage or an automobile loan, determine if you will need to borrow money either from an overdraft account or from your credit card to purchase it. If the answer is yes, then chances are that you are unable to afford the item on your own income. The exception to this however, is if you are using the new item to generate an income. For example, if you need to borrow RM5,000 to buy a computer and a camera for pursuing your freelance photography career, then you might be able to repay that debt using the proceeds you earn from the camera and computer.
You simply have other better things to spend your money on
Another important point to note is that if you have to forgo an opportunity or to delay something important just to be able to purchase a new item, then perhaps you also cannot afford it, not yet at least. For example, your car is in serious need of four new tires costing RM1,000. However, if you need to delay the tire change just to go for a holiday in Phuket, then you cannot afford the holiday yet. Spend your money on more crucial and immediate needs before spending it on wants.