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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.
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