The other day I was talking to a coworker about her quest to downsize her house. She is nearing retirement and post kids. As such she feels she now requires less than her current 5000 square foot home. Mind you her kids have been out of the house for at least 10 years, so really it is just her and her husband in this giant house. As we talked about her latest trials of attempting to sell her home we ended with her jokingly suggesting I should buy her home. To this I responded with a statement along the lines that I can not afford it.
What do most people mean when they say I Can Not Afford It?
Thinking about this conversation later got me thinking. When someone states they cannot afford something they typically seem to be referring to literally not being able to come up with the money to pay for something. This is especially true in real estate where there is sometimes a school of thought to buy the most expensive home you can afford. The thing is, while her house is listed about double my own, there is no doubt in my mind I could get a loan to buy her home were that my goal? So why did I say I can not afford it? Clearly I did not mean I could not come up with the money.
Going into Debt
I do not just use those five words when I am referring to a McMansion either. Recently we were running a bit close on our monthly variable spending budget. When my wife asked me about putting a deposit on a summer camp for my son I asked her to delay that purchase until the next month as we currently could not afford it. Now mind you, summer camp costs all of 250 dollars for a week so this is not a lending question as pointed out before. Some people do take the afford question a bit further and define it as not purchasing something if it means getting into debt. This is still not what I mean though.
I’ve already noted our savings rate is about 1x our yearly expenses. There is no conceivable way one non budgeted 250 dollar expenditure would cause us to spend more than what we save in a given month, let alone go into debt. In fact other than replacing a roof and a septic system (both once every 20- 30 year events) I can not remember a time in the last decade where we spent more in a month then our monthly income. So the question of affording it is not about taking on debt for me either.
Budgetting
No, in my case afford it means not spending beyond our budget. Occasionally, I might move the budget forward a month or other actions to balance better deals. When I do this and we end up over our monthly amounts I tend to tighten the belt. On one such occasion we were in target when my wife discovered 30 dollar buy one get one free shoes. Yes, even to these I said we could not afford it since we had not gone to target to purchase shoes. Needless to say my wife got a little cross with me on that one.
In fact this is probably the only contention point between me and my wife on money. Not the shoes mind you, but occasionally when I use the words we can not afford it her mind goes somewhere dark and she starts worrying we will be the people in the soup kitchen. Mind you my wife is a fairly frugal person too. She once told me she was in her twenties before she realized putting money in the bank was anything other than a means to get a lollipop for a deposit. And yet in this case affording something means something different to me then her.
The I Can Not Afford It Mind Shift
So I was thinking about this in the context of this lady’s house. Somehow previously I did not even realize this is how I defined affording something. Somewhere along the way my mind shifted. I stopped thinking about my income as something to spend and started to think of only the portion of my income I had not preplanned to save as something to spend. Essentially I had automated my savings to the point that I barely considered the savings my money to spend. I am not alone here.
Many Personal Finance bloggers write about how much car you can afford to own or what house. When they write these things they usually mean similar things to what I do when I say I can not afford it. They mean if your being financially responsible, funding a budget, and buying what you value then buying this item will break one of those three things. You can not afford to break those things in those cases as it will delay your path to financial freedom without brining value.
The I Can Not Afford It Mind Set Shift is the Key to Frugality
I do not know when my mind shifted to the point where I no longer saw my savings as mine to spend in the now. However, I do suspect most of my savings rate I can attribute to this mindset. I write all the time of setting goals and budgets. I write about tricks to avoid spending on things you do not value. Initially those are the things that get you on the right path to financial success.
But you know what, in the long run I suspect it’s more that mindset shift. When savings goes from something you do by brute force to something you simply do not question. When it becomes a required payment, just like a bill, that you simply can not touch. That mindset is the key to taking those goals, and making them habit. After savings is a habit, it just sort of happens.
Has savings become a habit for you? Have you reached a point where you no longer view savings as yours to spend? Do you find yourself saying you can not afford something when you really mean your self-imposed spending limits and values mean you should not make a purchase?
I’m a natural saver, but when things which are necessary come up, I make the purchase because they are necessary.
It’s interesting though, because you are a high income earner and while you could afford it (literally), you don’t want to because it’s not in line with your goals.
Exactly. You set your goals and values and you stick in those guidelines. Those goals and values are person specific. I still buy whats necessary inside the bounds of: Is it what I value, is it needed now, is a better deal to be had now, and how will it impact my on hand cash.
A great way is to automate…..and in a tax advantage account. You don’t easily have access to the money so there is no temptation to use those funds to buy something you won’t care about later plus you get a tax break. But it’s refreshing to think of not affording things in a way that it will sidetrack me a little from achieving my ambitious financial long term goals 🙂
Great approach.
You sound like a Budget Nazi. I thought you were like me: you don’t budget. You just compare month-on-month net worth. If it goes up, you are fine. If you goes down, you start some belt-tightening.
Your anecdotes sound a little “penny wise, pound foolish.” For example, your wife is eventually going to need new shoes so purchasing them in advance and on sale is saves you money over the long-term unless you assume there will be a “buy one, get one free” sale when your wife’s shoes eventually wear out.
My parents also budgeted like you appear to. However, they were big believers in taking advantage of sales. In other words, the monthly budget was not set in stone. They could & would amend the budget to buy items at significant discount.
During my youth, I remember that whatever I needed, my mother had it stored somewhere in the house. If the toothpaste tube was empty, I would look in the sink drawer and there 5 brand new tubes still in the box. New bar soap, laundry detergent, deodorant, socks, underwear, etc. were always in some closet or drawer because my mother would buy them on sale.
You are essentially engaging in semantics or coded language with your wife. When you say “We cannot afford it” you are really saying “that expense is not in this month’s budget” while your wife hears “We are so poor, we can’t afford $250 to send our children to summer camp.”
As you get older, these kinds of issues become insignificant. If you can pay off a house and build a net worth in the 6, 7 or 8 digit range, you don’t need to stress out about the summer camp deposit or price of new shoes. At some point, convenience and time win out over cost savings.
Here is another thing I have learned & read. Rather than buying “things” with your money, buy experiences and services that allow you to have more experiences. For example, there is a couples dog training class on the weekends and both you & your wife want to get a puppy and train it. However, you can’t do it because your weekends are full of grocery shopping, laundry, lawn maintenance, etc. If you are lucky, you will get to a point where you are FI and can afford to have your groceries delivered, send your stuff to be laundered and hire a gardener then by all means do so if you think the experience of the puppy & shared experience of training it with your wife is worthwhile. Just realize that the cost is not just the cost of the dog plus the cost of the dog training but also the cost of outsourcing some tasks to free up the time.
My rule of thumb is 0.1% of net worth. If a good or service costs less than 0.1% of my net worth, I’m not going to sweat it. 0.1% of my net worth is a 4 digit number which is much higher than any purchase I make on 360 days per year.
Another trick – buy services with recurring charges on the credit card which is closest to expiration. When the credit card expires, you will be asked to provide a new credit card number to continue the service. At that point, if you feel the service isn’t worth it, you don’t even have to cancel. Just don’t respond to the letter/email asking for new credit card information.
I think it probably came off a bit harsher then I intended. Let me be clear, the shoes example came off to me as an impulse purchase on my wife’s part. It wasn’t, which was something I learned later and a story for another day. But it’s a method of avoiding an impulse buy. My wife loves shoes, so you have to know the context. With camp my response was prefaced by we will write the check first thing next month. Financial shifting to avoid accessing a savings account. You’ll find I wrote about using credit cards for the same thing in the past.
For budgeting I have a good post on how I work here: https://fulltimefinance.com/no-budget/
It’s more of a hybrid approach. I usually don’t sweat the small stuff and I certainly don’t track to the category. But I do try to stay around an average. My reaction tends to be based on how far I’m already over for the month, whether I need to tap a savings account/reduce auto savings to pay the bill, and whether a deal timing requires me to act now. I don’t use net worth for anything as market movements exceed most of my inputs.
Without revealing too much I already have 18x expenses in non housing net worth. I doubt I’ll change much.
“I don’t use net worth for anything as market movements exceed most of my inputs.”
I came to a different conclusion several years ago. I never liked to budget; I found the process tiresome & tedious. When my net worth was much smaller, I used a month-on-month checking account balance comparison as a general measure of income vs. expenses. I still do that comparison every few months when I balance my checkbook. but haven’t taken any action as a result of the comparison.
As my net worth increased, my portfolio started to move by significant amounts relative to my income. Today, it can move (in one day) more than my gross monthly salary. In the four months following election day, my portfolio increased by more than my annual gross. I started thinking “Why am I spending time budgeting and tracking expenses?” Take-home income/net worth = Budget Apathy Index. As the number approached zero, I became more apathetic towards my budget & expenditures.
I’m still a little confused about the $250. You seem to imply that if you had written a $250 check at that point in time you would have had to “[access] a savings account.” That implies your checking account balance would have been overdrawn or close to overdrawn if an additional $250 check was written. That seems to be cutting it pretty close.
You use the word “frugality” as if it is a badge of honor. I use “frugality” as if it is a tool towards an end…like training wheels on a bicycle. In order to achieve FI, frugality is a powerful tool. However, if you have achieved FI or a high net worth, permanent lifelong frugality sound like a lifetime of needless sacrifices and/or a psychological condition which renders the patient unable to enjoy the fruits of their labor. I am attuned to this because my parents suffered from this condition (most likely brought on by childhood/early adult trauma resulting from the Great Depression, WWII & post-war Japanese economic conditions).
At some point, you have to break open the piggy bank and allow yourself some lifestyle inflation as a reward for your sacrifice & hard work. Otherwise, you will likely a) become discouraged and depressed or b) obsessed with savings rates while losing track of the purpose the savings.
In the 250 case we were already over average significantly for something else. Everything’s cumulative. To steal the clichéd and perhaps blown out of proportion latte effect as an analogy. One 250 check is laugh it off. A 250 check and a 2k medical bill in one month is a different matter entirely and sadly a real scenario this year. Even that though is admittedly an artificial construct since I shuttle off cash to other accounts at a high frequency.
I think it depends on your definition of frugality. I don’t condone or agree with living in deprivation. But I strongly believe in only buying what you value. So an impulse buy that will sit in the closet starting next week is out. But if you’ll read through some of the other stuff based on travel, cars, experiences and home I cannot for better or worse call myself or my wife deprived.
I think this context of I can’t afford it means, it’s not worth it to me. My example is golf. I golf at least once, often twice a week. I refused to pay $50-$60 to golf on a weekend without some coupon or online deal. I can clearly afford it, but I literally wouldn’t get what I perceive is $60 of enjoyment out of it, and would feel a bit guilty spending that much on golf. I am the guy that gets the whole foursome tickets and they pay back when we go. http://www.groupgolfer.com and http://www.golfnow.com are great. Golf now is really great if you want to just wake up, make sure it’s not raining and find a good local deal. Weekends are tougher I use group golfer for that one.
Great example Chris.