Being Able to "Pay for" vs. "Afford" Something...What's the difference?
How do you know when you can afford something? What does mean to be able to "afford" a purchase, anyway?
In today's podcast episode, we talk about the difference between being able to "pay for" vs. "afford" something, so that you can feel confident in your spending, trust your financial decisions, and make sure you're living within your means.
This Episode Discusses:
The difference between being able to "pay for" vs. "afford" something
Values-based spending
What it means to live within your means
How to prioritize your spending based on your values
An exercise on how to prep your budget for BIG upcoming purchases
Podcast Transcript:
Hello, happy Tuesday. So Tuesdays are the new podcast uploading time. Mark your calendars, because this is a big change. I changed the podcast uploading times to Friday, a couple of weeks ago, because I felt like I just needed a little bit extra work time to create this podcast, edit it and get it pushed out. But then I realized after uploading on a Friday a couple of times that didn't really feel good to me because I know for myself, I'm not really in a business mood on Fridays. It's like the time of the week when I'm kind of ready to chill, relax a little bit more.
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I am pretty sure you probably feel the exact same way. So I posted a poll on my stories. Last week and the big bulk of people said that they liked to see podcast episodes on Tuesdays. And that is a time that we are now uploading. So thank you to everyone in this community that voted in my Instagram story polls. It was very, very helpful helping me decide to like, make this change.
And by the way, if we're not friends on Instagram yet, please be sure to reach out, connect with me, follow me on Instagram. My handle is @savelivethrive. And I’m so excited to connect with you. So today we are talking about the difference between being able to “pay for” versus “afford” something. This isn't going to be a super long podcast episode, but it's going to be very short and sweet and carry a lot of impact because based on my own experiences, and my experiences as a financial counselor, I think that a lot of people have the spending mindset of if there is money for this in my checking account, then I can afford to buy this thing.
And that's really what we're going to be diving into in today's podcast episode, which by the way, if it is safe to do so, while you're listening to this podcast episode, please, please, please take a couple seconds to leave a positive review. This podcast is currently a one-woman show. It's just me in my office and the way that this podcast and the entire Save Live Thrive community grows is through organic outreach. Basically it grows organically and that comes from positive reviews, which platforms will then kind of push this podcast out to more people and also word of mouth recommendations and so forth. So I love you all so much. I'm so glad that you're a part of this podcast community, and it would mean the absolute world to me, if you would leave a review. So thank you and advance, and let's go ahead and start talking about the difference between being able to pay for versus afford something.
So, if I were to take this idea out of context of money and put it into a different situation, it would 100% be about ice cream because I freaking love ice cream. And also if you live near an Aldi, I am obsessed with their Specialty Select ice cream. It is so good. If you're by an Aldi totally recommended it's delicious. And that is what this analogy is going to be on. So let's say that I go to Aldi, and I buy the chocolate peanut butter ice cream flavor, which I absolutely love. It is so good. I could sit down and eat an entire gallon of the chocolate peanut butter ice cream, because I think it's that delicious.
But just because I could sit down and eat all that ice cream does not mean that I should. Just because I can doesn't mean that I should.
And the exact same thing is true of personal finances.
Being able to pay for something is the exact same thing as you can do something, you can buy this thing. It means that you have enough money in your bank account or enough money kind of anticipated in income for the month to buy something at whatever cost. I could even go so far as to say that being able to pay for something could even be paying for it with a credit card, which we all know is a recipe for living above your means. If you pay for something with a credit card and you don't have enough money, In the bank to pay off that credit card balance at the end of the month.
Whereas being able to afford something means that you comfortably have the money to buy that thing while still being able to cover all of your necessities and working towards other financial goals. Maybe that's buying a house, investing for your financial future, retirement. Maybe going on a vacation et cetera.
And when we look at our spending from a perspective of, do I have enough money in my checking account for this thing right now? That's the “pay for” perspective. We aren't looking at the big picture of our other financial goals and our values, which are the things that we care about most in life. And I know that I talk about that all the time. I'm constantly talking about our values because it is so important to look at our money as a tool to live a life that's in alignment with our values.
And when we look at our spending from a perspective of, “do I have enough money in my checking account for this right now?”, we aren't looking at the big picture of our financial goals. We're not taking into account the goals that we want to work towards, or our values, the things that are most important to us.
And when that happens, what can really easily occur is that then we start living above our means and our values, which can be things like family, relationships, adventures, experiences, et cetera. Our values can kind of start to take a back seat position, because we're buying things through this perspective of, “can I pay for it right now? Maybe we're making more impulsive purchases, for example.
And before we know it, we've kind of layered on so many different expenses. Maybe there's revolving subscriptions, maybe we've taken out an auto loan. Or leasing an apartment that is maybe outside of our comfortable range that we can afford.
And then before we know it, we are living above our means and we're not able to spend our money on the things that we truly care about at the end of the day. Those things that are aligned with our values.
And my experience started with this in my very early twenties. And I would look at my checking account whenever I was making any financial decision, I was not thinking about my financial future at all. I was very much living in the now, of do I have the money right now to buy this, and was never really thinking long-term or what's going to happen with my money and a couple of weeks, months, years, or decades from now.
And this all started when I was signing a lease at a new apartment and it was more expensive than usual. And. I signed this lease at this apartment, thinking like, oh yeah, like I can come up with the money to pay for this every month. I was not thinking about these other goals. I was just thinking, do I have the cashflow coming in to be able to make my rent payment? Not thinking about these other financial obligations that I could have. And then I did the exact same thing for my car payment. I was looking at, “do I have the cash flow on top of what I'm paying for my apartment to support this car payment?”
I wasn't even thinking about maintenance, repairs, insurance costs. I wasn't thinking about any of that. And I definitely was not thinking about building an emergency fund, making sure that the cash flow could support an emergency fund. I definitely was not thinking about saving for retirement. At that point in time, I was very much focused on the right now.
And all of those costs slowly started to add on top of each other. And we can even classify rent and a car as a necessity. It's like transportation and housing are absolutely necessities. So then when we start adding in the fun spending money, I subscribed, I had like so many different subscriptions that I was using at the time. One was like a makeup subscription box. I joined a gym that I never went to at the time and it wasn't an inexpensive gym. It was kind of a more expensive gym. And even when I was out shopping, I would make spending decisions based on the amount of money that I had in the bank. And I would literally be about to check out. I would have this pile of clothes in my arms, be doing all this mental math, and then look at my checking account. And if I had enough money in my checking account, I'd be like, oh yeah, we're good to go. And I would buy that thing.
And before I knew it, my money was pretty much spoken for, and that's when the credit card debt started happening as well because my expenses had started surpassing my monthly income.
And this all came from me, kind of living in this “Can I pay for this thing?” mentality. And it really starts with just one little decision at a time and they start really kind of stacking up and piling on top of each other.
And this happened because I was failing to look at the total costs of those items and how they would impact my financial future.
When we're talking about total costs, this can be things like looking at the interest rate over time. When I purchased this car, I didn't really factor in what the total cost of that vehicle would be when the interest rate was taken into consideration.
And I also wasn't thinking about the opportunity cost of not being able to do other things with my money, working towards other financial goals because of the impulsive pay for perspective decisions that I was making on a daily and weekly basis.
And what this ended up leading me to, as I had to back out of a vacation with two of my best friends at the time, like two weeks in advance, I talked about this on another podcast episode, but I realized like I do not have the money to go on this vacation. If I go on this vacation, I'm going to wipe out every single dollar in cash that I have, and then likely add on to my credit card debt. On top of that, I did not have an emergency fund at this point of time, let alone thinking about having my money work harder for me, by investing or planning for my financial future. Like all of those responsible things that I now teach people about with their finances today. I was not doing that at the time. I was living in this impulsive spending, “can I pay for this?” paycheck to paycheck cycle, which is a reason why I'm so passionate about personal finance and financial literacy today.
But anyways, That's where I ended up and it happened with these little decisions over time.
And this is really just such a, not sexy answer, but it's a very important one to really learn and absorb and to come to terms with, but an incredibly important part of becoming financially independent is learning how to spend within your means and starting to broaden your scope of these financial decisions that we're making from no longer being in the moment of, “do I have enough money to pay for this thing right now?” to opening up that perspective and taking our values, our long-term financial goals into account.
And that's when the mindset shifts from, “can I pay for something?” to “can I afford this?”
And when you start taking a look at this perspective and really starting to spend your money through the lens of, “can I afford this? Is this purchase aligned with my values?” you're able to identify what your financial priorities are. So let's talk about how you can identify your financial priorities.
So an exercise that I walk my clients through is to write down your top five core values. They could be things like maybe comfort, adventure, fun, love, romance, self knowledge, whatever.
Make a list of everything that you spend money on and compare them against your core values.
You can look at your spending for the last 30 days or so, and think through what are you spending on right now that doesn't match up. It's not really aligning with your values and then list out your expenses in the order of your values that you want to prioritize in your current chapter of life.
And this will not be on your priority list forever. This is just for the time being, personal finance is a lifelong thing. We're going to enter different chapters of our lives and our priorities and goals are going to shift, which is why I think it's really important to look at money from a perspective of our values, because our values tend to be very consistent over our lifetime, whereas our goals and our priorities will change depending on the chapter of life that we're in.
And what I really love about this exercise is that it brings clarity to what you actually want and care about. Not just what your friends and family are maybe doing or spending money on or what the media is marketing towards you. And like, for me, when I was in my really, really big makeup phase, I felt like I wanted to buy the latest makeup palette and so forth, but that was just like really good marketing people knew how to appeal to me to get me to buy like the latest Urban Decay eyeshadow palette. I don't know.
And so that's one thing that I love about this exercise. It also helps you still spend on the things that you actually want. To spend money on the things that you actually value and care about while cutting back on the things that you don't really like spending much money on at the end of the day, like you're cutting out those purchases that maybe you get home and two or three days later, you're like, “Ooh. I don't know why I bought that. I probably shouldn't have bought that thing”, but then, you know, maybe you don't want to go return it. Maybe you can't return it and so forth. You're able to cut back on those purchases that you don't end up liking after the fact.
But the next thing to think about is like, well, what if there is a big expense? How do you decide if you can afford a big expense, like a house or a car that you want to buy? How do you decide if you can afford it?
So I'm going to share a couple of rules of thumbs that you can keep in mind. One is the 28% rule for a mortgage or housing costs like rent, which is basically 28% of your monthly gross income goes towards your housing payment, that would be rent. If you are thinking about buying a house, for a mortgage that would include your principal, your interest, taxes, insurance, all of that. You want to keep that total housing cost below 28%. If you're thinking about buying a car, another rule of thumb is keep that monthly payment below 10% of your gross monthly income for an auto loan.
Now. These rules of thumbs. Rules of thumb. Rules of thumbs. I don't know if that's plural or not, but anyways. These are helpful, but they're not really taking into account your other expenses as well. That's why they're a rule of thumb.
And remember that these are also your minimum numbers. When we're talking about big, giant expenses, like a house or a car, you also want to factor in maintenance and repair costs as well, because those absolutely exist and will need to be added to your monthly spending plan so that we don't end up back into this situation of like entering the paycheck to paycheck cycle.
And also two weeks after actually living in our new house, I can say without a doubt that home ownership definitely has extra costs on top of the mortgage that you want to be prepared for. So that's definitely something to keep in mind.
So these rules are a helpful reference point, but if you want to actually compare it against your financial situation, I recommend budgeting as if you already have that expense in your monthly spending plan for three months before actually deciding on that purchase to see how it feels.
And an example of what this could look like is, let's say that someone is living in an apartment and their current rent is $1,200 a month. Their lease is about to end in like six months or so, and they're looking at apartments that are $1,500 a month. They want to see how that, that extra cost would feel. So in their monthly spending plan for three months, test out what it would be like setting aside $1,500 total towards your rent payments.
So that would mean if they currently have a $1,200 rent payment, budgeting as if that is a $1,500 rent payment and that extra $300 could go towards a sinking fund that, you know, could maybe go towards this purchase. Maybe it goes towards the security deposit down the road. If you find out that it actually ends up feeling good.
And what I love love love about this exercise is this is basically a risk-free trial period where you can see how it actually feels to have this expense in your monthly budget without making the commitment of buying that thing yet, or signing the lease or taking out the loan, whatever it might be.
And I've had clients do this and a lot of different outcomes can kind of come up. Number one, they find out that they can afford that thing and they feel really good about that decision, once they're making that commitment to a new apartment, for example. Or outcome number two, they find out that they can't afford that thing. It was not a comfortable amount of money to spend towards whatever purchase and are so relieved that they did this exercise because they otherwise would have locked themselves into some kind of loan or lease or whatever for a long period of time. And they were able to avoid a major cost burden on their monthly cash flow.
So understanding the difference between being able to pay for something versus afford something is a really important key to financial happiness. It will help you spend money on the things that you care about. It'll help you break out of the paycheck to paycheck cycle, and prepare for your future financial goals.
And one thing that I overwhelmingly hear from my clients when they initially start working together, is that the kind of worry that looking at money from this perspective values-based spending and thinking through the lens of like, well, “can I afford this” versus “pay for this?”, is they worry that this is going to leave them feeling really restricted financially. But when they start approaching their spending from a values-based perspective, they're able, they start feeling more comfortable and free with their finances because they're making meaningful and intentional decisions with their money, which feels freaking amazing.
They're saying goodbye to spending guilt.
They're able to look at their finances without feeling ashamed or embarrassed of where their money's gone, because they're able to see like, yes, I have comfortably made these purchases. I know the things that I spent money on this month were aligned with the things that are most important to me. And that is such an incredible feeling.
So. If you are loving having this conversation about the differences between being able to “pay for” versus “afford” something. And we also talked about some values-based spending there as well, this is just a teeny tiny little sliver of the type of things that we talk about inside of the wealth building bootcamp.
The program is now open for evergreen enrollment, which basically means that you can join whenever you are feeling ready and called to join on your financial journey. So if you would like to be part of the wealth building bootcamp, which is just an amazing community of women taking control of their money, improving their financial literacy, and it just has so much support from me, then head to the show notes, to learn more about the program and click the link to apply. I am seriously so excited about this program. It's like the exact same type of program that I wish I had access to six years ago at the start of my financial journey and it is just seriously, so amazing. I love it. I'm so proud of it. So I hope that you enjoyed this podcast episode. Let me know if you have any questions, and I will see you next week on Tuesday for our new podcast episode release date. Bye!
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Disclaimer: The content and information provided on this podcast is for educational purposes only and does not constitute professional financial, legal, investment, real estate, or tax advice. For recommendations on your specific financial situation, you must additionally seek the services of an appropriate licensed legal, accounting, tax, real estate, or investment professional.
Music written by Chris Glassman