Money in the Bank; But, Can I Afford It?

People confuse having a cash balance in their checking or savings account with being able to afford a desired item. Having cash on hand and being able to afford something is not the same. Financially savvy folks understand this and save strategically to buy what they want. This is why Suze Orman’s Can I Afford It? show segment is so popular.

First, you need to truly understand and separate needs from wants when it comes to managing your money. Something we seem to have forgotten in today’s society. You need to pay your mortgage or rent, your car payment, insurance and utilities. Paying these items provides security and comfort and helps you lead a better life. You may want to buy the latest car model to upgrade, or buy an expensive appliance, but you should ask yourself if you really need it, or just want it. I always ask myself three times or more when I want something if I really need it.  

On Suze Orman’s segment, she denies a caller’s request based on the information she receives from them about their overall financial picture. Often times, people will convince themselves that they need an item when truly it is just a want. Many of us do this even though we know that we have not met our future financial obligations as a kind of escape from reality. For example, we fail to increase our retirement savings through our salary, fund our IRAs, or set aside money for our child’s education.

This doesn’t mean you can’t shop. In fact, spending money should be included in your monthly budget. Working with a financial planner can help you develop strong financial skills such as a weekly, monthly and annual budget to meet your obligations and still have some freedom to spend. Here are some tips.

Create an annual spend amount based on your income minus savings and all other obligations. Break that amount down to a monthly amount.

For a specific item, consider how many work hours the item would actually cost you. A quick and dirty method is to divide the item’s cost by your hourly wage. The result is a rough pre-tax estimate of hours required that may change your mind about wanting the item.

With known future purchases, start now! Divide the cost by the number of pay cycles if you are earning a salary. This will give you an idea of how much extra you need to save per pay period and see if this amount fits into your spending money. If not, you may need to delay the purchase, or consider alternatives to the item, or ways to generate more income.  

Breaking down the amount into smaller goals could save you from blowing your budget or going off the rails and not meeting your obligations.  Getting back to some old school delayed gratification when it comes to saving and spending is not a bad thing. As an independent Certified Financial Planner™, I can help you with a strategy tailored to your goal, timeline and income. Contact me and let’s get started! #talktometuesday #savings #SuzeOrman #Hireaplanner #goals #retirement #spend