One of my clients said this to me recently, “Since learning the Money Mastery principles, it has been so much easier for us to look at the big picture. We realize now that our whole lives revolved around the here-and-now before we were taught to look seriously at the future.”
The “Big Picture” view this client finally caught site of is changing her and her husband’s lives forever. Unfortunately, however, most Americans don’t catch this vision in time. Often the ability to be farsighted (or see the big picture) is thwarted by the nearsighted need to spend money right now.
The Disease of Consumerism contributes to this nearsightedness. Today’s society is being devoured by the need to consume. What’s worse, it doesn’t understand the impact of its consumption. It’s easy to exchange coins for goods and services — it doesn’t take talent or skill — even little kids can spend money. It’s taking control of money that most people find difficult. The childishness of spending money thoughtlessly and without a plan can be attributed to the respect toward money that has been lost from our society. I find many of my clients are still acting irresponsibly about money, as if currency could be passed around like paper money from a Monopoly® game.
One of the best ways to combat this irresponsible and shortsighted behavior is to become more aware of what I call “The Spending Decision.” Each time a person decides to spend money, they should consider the following three fundamental elements of The Spending Decision:
Utility: Do I need or just want this item: Do I like the color, taste, size, power, dependability, performance, etc. of the item?
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 a credit card? Will the bank give me a loan?
Affordability: Can I “afford” the item? Does it fit into my long-range goals? What impact will this purchase have on my financial future?
Each of these elements should be carefully considered every time you buy something. However, many people do not often give the third element, “affordability,” any real consideration. In fact, most of the time, they think that because they have access to money in the form of cash, check, or loan, that they can afford to purchase something. Nothing could be further from the truth! The most critical question of the three is whether you can afford to make the purchase.
Understanding the definition of affordability will enhance your capacity to see the big picture like nothing else and is essential if you are going to make wise spending decisions.
Affordability can only be determined based on the following criteria:
Long-term Financial Goals. If you can achieve your personal long-term financial goals and spend money in this instance too, then you can “afford” the thing you are considering for purchase. For example, you might decide to buy a third car today at a cost of $20,000. You have the means to purchase the car; it seems harmless enough, right? Maybe. But without looking at the big picture and your long-term financial goals, you might not see that you truly cannot afford the extravagance of this automobile because $20,000 out of your pocket today will rob you of all the interest you would have earned at retirement had you left the money in the bank. Remember the Time/Value of money: Purchasing the car will end up costing you $112,000 you could have had in your long-term savings for a later date when you really need it. Can you afford the car when you consider your long-term financial goals as part of the spending decision? You decide.
Remember, 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. If you spend money on consumable goods rather than toward paying off debt or accumulating wealth, you must understand that such a decision eliminates opportunities for the future.
Affordability, then, can ultimately only be defined within the context of your long-term goals.