What’s your definition of ‘affordable?’
Anyone who's been in a situation with 'serious' cash flow issues eventually ends up asking themselves, or being asked, the question of Doom: "Can I afford to (do/buy) this?" Depending on what your definition of 'afford' is what makes all the difference between the overly thrifty and the spendaholic. But in reality, it should boil down to the secret underlying question: "Why do I need this now?" Necessities are no-brainers. The hardest place to be is where you don't have any choices to make -- you have to count your pennies and clip coupons to make ends sort of meet. But it also gives most folks (I hope) a greater resolve when it comes to saying 'no' to the 'shiny'. While I wish ya all better financial futures, this post is probably not really for you. The people who are at risk are folks who have some wiggle room in their budgets -- who have the power to choose. This post is for you. 1. That credit card is not a 'get an item free' card. It makes it -more- expensive in the long run, actually. You shouldn't be buying things if there's any balance on your card at all, because the things you buy while there's a balance actually offset the payment you made... last month. Ignoring the math in the fine print on the statement for a second, consider coming into the month with a balance of $1230, of which you paid $50, say. If you charge another $90 on the card, not only did you not really pay your balance down, but you added $40 -- and the interest on that $1180 that remained. I speak from experience here; I let myself get into a situation where multiple credit cards were in use in order to 'spread out' the balances. It took years to get out. The best way to use a credit card is as a 'I'm not carrying enough cash on me right now, but I know it's in the bank account' card. That should be your long term goal. 2. For that matter, recognize what the -real- value of your bank account is. My dear SO once told me, after cashing the check from her temp job, "I saw how much money we have in the account. Do I really have to get a new job that urgently?" My reply: 'You're not seeing the bill from the trip back east being counted in there. Subtract this amount.' Grab your checkbook, if you have it handy. Go back one month (July). Run your finger down the balance column and find where the lowest point in the month is at any point. Write that number down, and the date. Now go back one month and do the same exercise. Repeat until you have four to six months worth of data. You'll find that the low point probably happens at or around the place you pay your rent/mortgage payment, or if you've made a big lump payment on a credit card. What you now have is the best barometer of whether you can afford something, as well as the running trend of your savings/spending. * If the first number (July) is the highest number of the entire bunch, congratulations; you're saving money. * If not, don't panic; when you're playing it close to the wire, there will be some months that you can't help but be in the red. Mine are whenever the car insurance premiums come in, four months out of twelve. * The 'low water' mark you've written down is the absolute maximum amount of cash you can spend without getting yourself into financial sheepdip. Anything more than that runs the risk of bouncing a check on your biggest ticket item. And as some of us know all too well, bouncing a check is Very Bad. * If you really want to be safe: subtract a three digit number from that 'low water' mark, and use -that- as your maximum burn number. If that number is negative (you have less than $100 in the bank at the low water point) -- the answer should be 'no'. Because lots of emergencies can come up that will easily run you over $100. Case in point: visit to the hospital, uninsured, for an infection: $385. Smog repairs: $362. Same month. (Note that this scheme works best for people who get regular, bi-monthly paychecks -- that fixed income offsets the variable expenses. If you're on hourly/temp, your mileage may vary.) 3. Treat or trick? 'You should treat yourself sometimes' is emotional reassurance/coercion by friends and family who don't -get- that you're trying to live on a budget. Sometimes it's even by your own subconscious. While I'm not insisting that you live like a hermit, 365 days a year, I'm also not going to say it's okay to look the other way when you buy a Jamba Juice on the way home every day. $2.25x23 working days in August? $51.75. It adds up. It may not seem like much, but it adds up. Whatever you spend, you aren't saving, and it's not available when you -really- need it. There are a number of things I could really use about now, but I'm holding out for a month where I'm not running a negative-three-digit deficit. Sure, it means not seeing movies in the theatre, or not going out to dinner with friends, but I simply -cannot- treat myself now and make things worse as a result. That's no treat. 4. Avoid the 'I'll make it up later' trap. It's very easy to say, 'oh, I'll pay it off next month'. Especially if you've got a financial forecast that says that you've got a positive cash flow. You should not be 'spending it forwards' if at all possible for two reasons: a) Out of sight is out of mind, and it's -very- easy to forget what you spent a couple of weeks ago until the credit card bill shows up. This possiblity goes up when you share your credit cards with someone else -- you're relying on them to tell you what they're spending. b) You can't predict the future. What was once a very promising 'recovery' month went three digits in the hole in under a week flat into the month. (By the way, if you have a car in California, set aside about $380 right now if it's been a year since your last smog check -- the new smog laws almost automatically fail any car built before 1996.) There will always be the chance more expenses than you expect. My only saving grace in looking at my balance sheets right now is saying, 'I'm glad I was at least somewhat prepared for this' and knowing that I have enough to withstand a sudden layoff, still. Which brings us back around to the beginning of the discussion. Your ultimate goal is to have a low water mark that will cover being jobless for a month. Two, preferably, if you can swing it. It'll feel like you're saving needlessly, but right now, in my shoes, all of those 'I can't afford this' choices I made months ago are why I'm not a panicking stressbunny right now. Because the rent got paid on time, same as always. 5. If your cash flow is negative for the year, what should the answer be? If you've lived in a place for long enough, you should be able to predict what the fixed expenses (rent, power, garbage, cable, phone) will be for the year simply by adding those bills up and dividing by the number of months to get the running average, and adding a small fudge factor to it. It'll take a bit of doing at first to fill out a spreadsheet*, but that information is all there in your checkbook. By writing down your fixed expenses, you know more or less what you'll be forced to spend in the months to come. By looking at what you can save /assuming nothing else gets spent/, you'll get a general idea on whether you can, in fact, pay off the humongous bill sitting behind you, or whether you can afford something if you absolutely have to have something you can't pay for outright. I consider burning an entire year's worth of pay and having nothing to show for it a giant neon sign of 'no, you can't afford anything outside of what you've already spent'. The federal government can get away with deficit spending. You cannot. ---- This being said, there are simply some things in life you can't pass up when they happen. Death in the family? Wedding for a sibling? Make the top of the list. (The former is why I'm in the hole for the year. I couldn't not go, and yet I'm paying for it now through December.) And you should never mess around with your health if you can avoid it. Because let's face it. Most health issues get -worse- if left untreated. I wrap up with this little bit of wisdom: The choices we make today affect what happens to us tomorrow. While it is not okay to continuously live in fear of disasters that may never come to pass (you only live once, after all), it doesn't hurt at all to be at least slightly prepared for their eventuality. Skip desert if you'd be taking it home in a carryout box. -Traveller * If anyone wants to hear a detailed explanation on how to set up a quick and dirty expenses tracker in Excel, let me know and I'll post my system up. You've probably seen most of it before, though.