In society, there’s a common misconception about the actual meaning of the word “afford” when it comes to personal finance. For many, they believe they can afford that new car, iPhone, vacation, etc. as long as they can pay cash for it, or worse finance the purchase and make the monthly payments without going into the red for their monthly spending. In fact, it’s a common mindset in the “debt-free” community to stress the importance of paying cash and never borrowing for today’s luxuries. I agree with them 100%, but I would take it a step further and say that even if you can pay cash for something, there’s still a very good chance you can’t “afford” it.
To be able to afford something, especially luxury items or other “wants” (vs. needs) signifies that you can pay cash for it after you have met all other obligations. For example, if a family can pay cash for a $2,000 vacation but they haven’t yet contributed 15-20% towards retirement, they don’t have an emergency fund in place, or are missing out on other financial milestones/obligations, they certainly can’t afford that vacation, even though they could easily pay cash for it.
This idea brings me to a phrase that I first came up with to bother my wife (like all good ideas). Eventually we began to build our financial plan around this phrase. Before we were even married I expressed to her the personal importance I placed on paying ourselves first and living significantly below our means. One day I joked that we would live in “a state of artificial poverty” by saving and investing very aggressively (saving and investing roughly 30-40% of our gross pay, far above the recommended 15%) and then living on what’s left. Now, I don’t want to minimize the stresses and difficulties that many face today while living in true poverty. But, at the same time the more we talked about living below our income level, the more it made sense and we began to develop our financial plan around this idea. Additionally, we saw value in teaching this method to our children while they’re at home and very impressionable. We feel this will teach them the importance of delayed gratification, work ethic, and to find joy in non-material things. Then, by investing so heavily early in their lives and essentially front loading our retirement savings very early on when those dollars have the most time to grow, we will be able to cut back on our investing and direct those funds to help cash flow our children’s educations.
Once our children are all grown and out of the house, they will hopefully have a positive approach to money management and what it takes to earn a dollar cemented in their character. Our investment portfolio and savings should have grown to an adequate amount to allow us to travel to visit them, enjoy nice dinners, spoil grandkids and live out our days in comfort and prosperity. Beyond raising our kids, one of my favorite things about this plan is how it’s helped us realize what truly brings us joy and conservatively spend money on that rather than give into all those lifestyle purchases that society tells us will make us happy. In fact, you’d be hard pressed to find a little family that laughs, jokes and enjoys life as much as we do. To sum up our plan in one sentence, we invest heavily now as a young family during our children’s formidable years and front load our retirement, then we will divert some of those dollars to help cash flow college once our kids are older and then really start enjoying all the abundance once they have moved out. This plan may not be exactly in line with your goals, and that’s ok, but it wouldn’t hurt any of us to cut back on our lifestyle a little more now and enjoy the benefits later.
Now, look at your spending and your wants. Look at how you have already paid yourself. What brings you joy? What do you want to bring you joy in the future? Plan to spend accordingly.