What Is True Affordability?
During the past decade, lenders and the media had us believe that affordability simply meant qualifying to buy it with a loan. Of course, that era ended with dire consequences, so that can't be right. What is true affordability anyway? Can you spot it if you come across it?
The Dream House Lover
Sammy loves the ocean, and he is making a ton of money. In fact, he is going to make more than $1 million dollars this year alone. From what you just read, you'd think that he's one of the nation's richest right?
But not so fast.
Though he is debt free and saving money in a rapid pace, he doesn't have much to his name yet. You see, his business is just starting to pick up. While he can probably cash in $500,000 a year after taxes at this rate, it would still take him eight years before he amasses four million, the price of the home he wants to buy. "I can afford it" he thinks. Or can he? And when?
The Average Car Buyer
Whether leasing is a good idea comes up all the time. Most people who favor leasing will tell you that the numbers work out in their favor if they like to change cars every few years. Some will tell you that it even reduces their liability, because no matter what happens to the car, they are hands free after the lease term is up. Now, let's say that your take home pay (after taxes) is $5,000 a month. It would be reasonable to say that you can spend $500 a month on your car right?
But then again, what if, when time comes to change your house, you couldn't afford the one you wanted? What if I told you that if you chose to drive that used beater and never changed cars instead, you would have that extra $50,000 needed to afford that nice house? Was the car really affordable for you?
What I Think Is True Affordability
Of course, there are infinite examples and unlimited possibilities, so worrying about the future is useless, impossible, and most important of all, unhealthy. So what to do? When I think of whether something is affordable, all I worry about is whether I could afford overpaying for it. Whether it's a house, a car or a chocolate bar, if I could knowingly overpay for it because other factors outweigh the financial ones, I know I could truly afford it.
Just to clarify, I'm not saying that I would simply pay more for something because I didn't do my research. If I could get the same product somewhere else that's exactly the same, like a TV that's on sale at another store for instance, then it's unwise to buy it for a higher price. All I'm saying is that if a slight price fluctuation isn't going to be devastating, then it's likely that I can afford it. Otherwise, it's simply too expensive, and I should work harder to make more money if owning it is that important to me.