The Most Dangerous Question

You’re walking down the street on a sunny Saturday morning, savoring the 75%+ of your weekend that still remains, when a question pops into your head. Unbeknownst to you, this seemingly innocuous query is the single most dangerous threat to your financial well-being.  

Without even realizing it, you’re standing face-to-face with a menacing monetary maw.

A catastrophic cash-flow chasm.

An awe-inspiring asset abyss.  

A big-ass threat to your cheddar (apologies, my alliterative ammunition apparently abated.)

I’m talking about a question you’ve literally asked yourself thousands of times in your life. One that I’d be willing to bet you’ve already asked multiple times this week and one that you will almost certainly ask several more times before the end of the weekend:

Can I afford it?

This is such a dangerous question because it’s deceptively difficult to answer in a thoughtful and intentional way. Nearly all of the intuitive ways of answering it do damage to your financial health, ranging from slowing the growth of your net worth to permanently handicapping your mindset and habits towards money. 

Let’s look at several common bad ways to answer this question and then a few great ways to do so:

Bad answer #1: Yes, I have enough money in my checking account.

This is the go-to answer for folks who’ve grown accustomed to living paycheck to paycheck. For that group, the first few days of spending following payday can be gory enough to make personal finance nerds like yours truly swoon. Mini spending binges are followed by painful periods of self-denial and sacrifice. Oftentimes, this is the gateway drug to bad answer #2 below.

Bad answer #2: Yes, I have enough left on my credit card before I hit my limit.

Well, that really escalated quickly! Now you’re not only spending money that you have but need for other purposes but you’re actually spending money that you don’t even have! I won’t belabor the point here, there is no upside in kicking someone when they are down. If you are perilously close to maxing out your credit card(s), your spending on non-essentials should be as close to zero as possible.

Bad answer #3: Yes, I make $XXX,000/year. I earn this much money in X hours.

The problem here is that knowing your income alone is never enough information to determine if you can afford something. Someone making $100,000/year with $150K in student loan debt and a $6,000 mortgage payment can afford a whole lot less than a debt-free teacher pulling down $65,000.

Bad answer #4: I’m not sure, but I’m going to buy it anyways.

Burying your head in the sand is never the right strategy. You owe it to yourself to commit to seeing things the way they truly are. It’s one of the single best habits you can develop. Once you do this necessary work, you might find to your surprise, that the answer is “Yes” much more often than you thought it would be.

Slightly better but still bad answer #5: I’m not sure, so I’m going to pass.

Although this approach will keep you out of trouble with debt, it leads to a seriously dysfunctional relationship with money. I’m a firm believer in Ramit Sethi’s spending philosophy: Spend extravagantly on what you love and cut costs mercilessly on what you don’t care about. If your default answer is always “no”, you will develop a scarcity mindset and then when you need to make a large unplanned purchase, it’s going to throw you for one hell of a loop.

Worst answer: I’m not sure but I deserve it.

What you deserve and what you can afford have absolutely nothing to do with each other. There are thousands of people on this planet who deserve nothing more than a glove full of bullet ants, yet can afford more than everyone you know combined. Conversely, there are probably people in your neighborhood who volunteer more in a month than you do in a year and can’t get to sleep because of their dire financial situation.

This can be a bitter pill to swallow but the sooner you learn it, the better. If it helps, think about it like the weather.

Imagine a truly draining week at work. You consistently gave it your all, motivated your team to reach new heights, provided great guidance to a mentee, and still had enough gas left in the tank to play with your kids before bed every night. No one would dispute that you deserve beautifully sunny weather for your Sunday family trip to Lake Michigan. 6:30 AM rolls around…and you’re jolted out of bed by the first of countless peals of thunder. No one would disagree that you deserved good weather but that’s simply not how it works.

“This is going to blow right over, kiddos.”

Unfortunately, this is a common mindset toward spending and it’s responsible for countless hours spent in financial misery.

The common denominator in all of these bad answers is that they fail to recognize that every spending decision, at its heart, is a question of trade-offs. The true cost of something is the value of what you are giving up in order to buy it. This is true no matter how much money you make or how much money you have.

For example, let’s say you are torn between buying a nice house for $300,000 or a slightly larger nice house for $330,000. The monthly payment for the more expensive house is only $143 more and yes, you will pay more in interest over the life of the loan but $143 bucks a month is like less than half a car payment! You can afford that, right?

Well maybe you can but this is the wrong way to think about the choice. The choice is actually House B for $330,000 or House A for $300,000 and an extra family vacation every other year.

Or House A and 10 fancy dinners out with your spouse every year for the next three decades.

Or House A and an entirely new wardrobe every two years.

House B might still be the right choice but it’s not as simple as “can I swing another $143/month?”

Ultimately, you have to come up with a way to put your potential spending in context so that your decision making process for buying things isn’t simply whether you have that much money readily available.

Here are a few good ways to reframe the question of whether you can afford something:

Good answer #1: Yes, I’m using money from my “fun” account.

This strategy also comes from Ramit Sethi. He advocates setting up an account whose sole purpose is for guilt-free spending and he is a big proponent of automating your finances as much as possible. Once your bills are paid and automatic contributions to your retirement and investment accounts have been made, whatever is left is yours to spend however you see fit. The key here is that this account shouldn’t actually exist until you’re covering your monthly expenses and your monthly savings goals.

Better answer #2: Yes, even though I know it means I won’t be able to buy that new watch I’ve had my eye on for a few months.

All you really need to do before making any purchase is compare what you are considering buying to every other possible use of the same amount of money, assign each potential purchase a utility value, and buy the one that provides maximum utility. As your preferences change across the year/month/day, simply update the utility values for all possible purchases in real time and you are good to go!

Once we are all walking around with implanted AI-powered cognitive enhancements, this is probably what your thought process will resemble. Until that terrifying day comes, one of the most powerful ways to contextualize potential spending is to use what you’re really passionate about as a lens. If fancy shoes are your thing, translate $100 to x% of a new pair. Like to go to shows? Start thinking about cost in terms of concerts, not dollars.

Best answer #3: Yes, it’s aligned with my values and I understand the trade-off I am making.

This strengthens answer #2 by incorporating the understanding that how you allocate your resources demonstrates your true values.

In the end, it boils down to building the habit of being conscious and intentional about how you spend your money. By doing so, you completely drain the danger from the once perilous question “Can I afford it?”  You turn it into a mild monetary molehill. An easy-going economic enquiry. A barely noticeable budgetary bump.

Sorry, I might need an intervention.