My definition of afford

I think when people talk about being able to "afford" things, they're using the wrong definition.

The question is not, "Do I have the money available?"

It's, "Can I spend this money and still be on track for what is important to me (aka goals)?"

Here are two examples.

Example #1: Cash on hand

John and Jane want to have 6 months of expenses saved up in their emergency fund (a liquidity goal) which amounts to $100,000. They currently have $92,000.

They are shopping for a new TV. They really like this $2,500 TV and would pay for it out of cash.

Can they afford it?

No.

They have the cash on hand, but using their money on the TV will prevent them from reaching their liquidity goal.

Example #2: Cash Flow

Let's continue with John and Jane. They've calculated their retirement goals and need to be saving $4,300/mo to stay on track. They're currently saving $4,300/mo.

They're looking at that TV still. They can't pay cash since that would tap into their emergency fund. They could finance it, for $200/mo for 18 months. They could decrease how much they're saving into their brokerage account (which is assigned to their retirement goal) to pay for it.

Can they afford it?

No.

They have the excess cash flow, but using their money on the TV will prevent them from staying on track for their retirement goal.

Conclusion

I know this seems harsh, but once you reach a certain income and asset level, you probably have the cash and cash flow to "pay for" most things. It's easy to think you can "afford" it. But that's where having a clear financial plan helps. If paying for these things would cause you to sacrifice things you've pre-determined are more important, then you can't afford it.

You may still choose to buy it, but redefining "afford" will help prevent a lot of misguided purchases.

Taylor Stewart, CFP®
I'm a financial planner in McKinney, TX and founder of Ataroke Wealth, where I provide fee-only financial planning and investment management on an hourly, short-term, and ongoing basis. I work with clients locally and across the country. I also build financial planning software for advisors at Kerdora.