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Can You Afford That Purchase?

Farnoosh Torabi

According to Merriam-Webster's dictionary, to "afford" something means that you are able to "bear the cost." But, let's say you earn $50,000 a year. Can you afford, say, a $1,500 flat screen TV or a $3,000 watch? On paper, you may earn enough to "bear the cost," but in reality, we all know there's far more to affordability than just simple math.

Consider this analysis before deciding whether you can afford it...or not.

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The first, and most obvious question to answer is "how am I going to physically pay for this?" Now, this answer does require a bit of math. Start by reviewing your income versus your monthly expenses. Can you comfortably pay for this purchase in cash after accounting for your bills and your various savings? Or, will this exhaust every nickel of discretionary income and leave you vulnerable in a financial emergency? If you can pay for the item in cash with substantial savings to spare, you may be on your way to affording it.

However, if the purchase costs more than what's left in your checking account and requires using a credit card, you'll want to think long and hard before swiping. At the least, make sure your monthly payments lie well below your means, and have a plan to pay off the entire balance as soon as possible, preferably in the next month to avoid paying interest.

From here, you also want to consider any and all short-term trade-offs as a result of purchasing the item. While you may be able to afford the TV or watch in cash today, will it mean giving up something else tomorrow in order to make the payment? For example, will it mean ditching your summer vacation plans or forgoing dinners out for a month? If you're fine with incurring opportunity costs then you may be able to truly afford it.

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That said, we shouldn't rationalize all opportunity costs. If affording something means sacrificing our hard-earned savings—be it rainy day, retirement or college savings—let this be a big red flag that you simply shouldn't afford it because it's not worth it.

Finally, remember to think long-term, as well. What might be possible trade-offs in the future? For example, let's say you have enough in the bank to buy that new plasma, but if you have big plans to save up for a house or start a family in the next year or two, you may not want to afford it. After all, it may mean making an even more important trade off down the road. So while, you can afford it today, it may not be actually be worth it in the long run.

This article is part of a series related to being Financially Fit