Deciding whether you can afford a purchase involves more than just checking your bank balance. It
requires assessing your financial health and ensuring that the expenditure aligns with your long-term
goals. Here’s a straightforward guide to help you make informed decisions about whether to proceed
with a purchase.
Evaluate Your Budget
Start by reviewing your current budget. A well-structured budget details your income and expenses,
allowing you to see how much disposable income you have. Before making a purchase, ensure that it fits
comfortably within your budget without causing you to exceed your planned spending limits.
Consider Your Savings Goals
Check how the purchase aligns with your savings short-term and long-term goals. If the item is a
significant expense, consider whether it will impact your ability to save for essential goals such as an
emergency fund, retirement, or a down payment on a house. Ensure that making this purchase won’t
derail your long-term financial plans.
Assess the Necessity
Evaluate whether the item is a necessity (“need”) or a luxury (“want”). Prioritize essential needs and
long-term investments over discretionary spending. If the purchase is not crucial, it might be worth
waiting until you are in a better financial position or until it fits more comfortably into your budget.
Review Your Credit and Debt
If you plan to use credit for the purchase, review your credit situation and existing debt. Ensure you can
manage the new payment without straining your finances. High-interest rates or accumulating debt can
impact your financial stability and increase stress.
To learn more about the Debt-to-Income Ratio and how it affects your financial situation, click here.
Calculate the Total Cost
Understand the total cost of the purchase, including any additional fees, interest, or ongoing expenses.
For instance, when buying a car, consider the cost of insurance, maintenance, and fuel. Ensure that
these costs are manageable within your financial plan.
Consider Your Financial Cushion
Evaluate whether you have an adequate financial cushion to cover the purchase. Having an emergency
fund or buffer can help ensure that you’re not compromising your financial security for a single
purchase. Avoid spending so much that you leave yourself vulnerable to unexpected expenses.
For guidance on savings goals throughout life, click here.