Achieving your long-term “retirement” goals is only possible as you look at your short-term behavior to see if it is hindering you. One of the best ways to combat irresponsible and shortsighted behavior that keeps you from accomplishing your long-term goals is to become more aware of your thinking and behavior during the time that you spend money. Each time you decide to spend money you should be considering the following three fundamental elements of what I call “The Spending Decision:”
1. Utility: Do I need or just want this item? Do I like the color, taste, size, power, dependability, performance, etc. of the item?
2. Availability: Do I have the money “available” to pay for the item? Do I have cash in my pocket, can I write a check, should I use my credit card, will the bank give me a loan?
3. Affordability: Can I “afford” the item? Does it fit into my long-term goals? What impact will this purchase have on my financial future?
Most people do not give the third element any real conscious consideration. The most critical question of the three you should be consciously asking yourself is whether you can afford to make the purchase.
The Definition of “Affordability”
Affordability can only be determined by considering the following:
1. Long-term Financial Goals: Will purchasing this item still allow me to achieve my long-term goals?
2. Opportunity Cost: Be aware that spending money always comes at a cost. You only get to spend a piece of money once. If you choose to spend a dollar in one place, you will no longer have it to spend in another. When spending, always ask yourself: “what opportunity could I lose in the future by spending this money now?”
In the absence of long-term financial goals you will make financial decisions you cannot afford!