It’s time to replace that old car. Your repair bills are
starting to add up to more than the payment would be. But how
do you know for sure if you can afford another vehicle?
People ask themselves this question regularly, and not just
about cars. Unless you have control of your finances there is
no way to tell. You have to know how much your income is and
how much your bills and expenses are to find out if you have
enough left over for any purchase.
The only way to accomplish this is to have a budget in place.
Your budget has to be as accurate as possible and include money
for your long and short term savings. All of these things must
be considered before you can determine if you can afford to buy
anything.
The best way to start is to determine how much disposable income
you have. You do this by only using your take home pay plus any
other income you may have after any deductions.
The next step is to put down on paper all of your reoccurring
bills such as your house payment or rent, utilities, phone,
internet costs, car payments, insurance, etc. These are fairly
simple to determine, however, you will have to estimate bills
that do not have a constant payment each month like your
electric bill.
Now comes the hard part. You have to find out how much you
spend each month on your household expenses. This includes
everything from car gas to groceries. The most common method of
doing this is to keep track of everything you spend for 30 to
60 days, however, it seems like most people will not stick to
this for that long.
I would suggest that you sit down with a piece of paper and
brain storm what your expense are. I will tell you now that you
won’t be able to think of everything so you will have to make
adjustments later. It’s hard to remember things like Vet bills.
Now that you know what your income, bills and expenses are you
have to set up your savings if you don’t already have one. This
should be split into long and short term savings. This should
be considered just as important as your bills.
It is best to save at least 10% of your income with 50% each
going to long and short term savings. The short term saving is
going to be your buffer to cover unexpected expenses and possibly
for things that are only paid every three, six or twelve months.
Your long term savings needs to be invested in
some way. It is always best to consult a professional
financial adviser before making a decision how to
invest.
Now to answer the question “Can I Afford This?”. If you have
enough money left over, after considering all of the above, to
afford an extra payment then go for it.
Here is a simple formula:
Income - Bills - Expenses - Savings = How much money you have
to pay that extra bill
If the item you are considering is important you may want to
use some of your short term savings toward things like a down
payment. But remember you still have to have enough money each
month to cover the regular payment.
What if you don’t have enough to cover that extra payment? Then
you quite simply Can’t Afford It.
Terry Rigg is the author of Living Within Your Means - The Easy Way http://www.homemoneyhelp.com/ebookadpage.html and editor of the Budget Stretcher web site. Join the thousands of subscribers to The FREE Budget Stretcher Newsletter and get great articles, tips, downloads and a lot of Budget Help by visiting his home page at http://www.homemoneyhelp.com