Build Affordability in Your Spending Decision Process: Part 1 of 2

As I listen to the Federal government’s repeated rhetoric in response to the severe, continuing, housing crisis in the USA, I reflect on the meaning of affordable. The government seems to be ignoring this basic idea. Ostensibly, it appears determined to keep folks in homes they bought before the recession, despite their financial conditions–an approach that creates false hope, and leads inevitably to frustration.

Because the government does not set affordability standards, its spiel appeals to public emotions and pits people against financial institutions. To be sure, before, during, and after the recent recession, many financial organizations operated unethically in their dealings with home owners. Even so, each home owner decided to buy her home, many with sub-prime loans. Sadly, some have, and others might have to leave their homes because they can’t afford to keep them. This leads to three questions:

1. What does affordable mean?
2. Who decides affordability?
3. What should happen to people living in homes they can’t afford?

Affordable

I suggest the overarching goal for each household should be to live a debt-free lifestyle. In this context, what does affordable mean? I think we should answer this question separately for buys other than a private home, and for buying a private home.

For buys other than a person’s home, affordable means…

ability to pay for an item and not take on debt, and not compromise current and projected household budgets, plans and commitments.

To buy a home, affordable means…

ability to buy the house, with or without a mortgage, so that the total estimated ongoing costs do not compromise current and projected household budgets, plans and commitments.

I believe a person should not borrow to buy any item other than his home. Accordingly, excluding your home, which I deal with in part two, you can’t afford to buy an item if you must borrow to get it! To buy a vehicle, a fridge, stove, or other consumer item, pay cash, including using a credit card and paying the full balance.

Pay Cash For Your Personal Vehicle

Pay cash for personal transport? Yes, save to buy a car, van, and other personal transport. These are not investments whose value grow–they lose value continually. You might have to start with an inexpensive vehicle while you save for the ideal one. If available and convenient, as you save, use public transport during the week, and a rental as needed on weekends. Be creative, examine non-borrowing alternatives to achieve your objectives of debt-freedom with regular, convenient, and reliable access to transport.

You need to start early to save regularly to buy your first vehicle; continue saving to replace it, and keep repeating this procedure. Monthly, set aside a car payment to your personal designated savings account–learn to be disciplined and do not neglect this.

Pay Cash for Other Non-Residence Buys

What about buys other than your personal vehicle and private dwelling? The same principle applies. Is there any consumer item worth getting in debt for? I don’t think so. Furniture? Appliances? Vacation? Grown up toys? They can wait! The key is to learn to define wants and needs so that when items break or wear out, you do not think of replacing them automatically. If the fridge breaks and you can’t use it, instead of deciding instinctively to replace it using your debt-riddled credit card, while you save to buy another fridge, look at alternatives to keep foods cold and frozen. Seek temporary help from your neighbor, church, Bible study, or other group. You will need patience and humility…lots!

As with your transport, save systematically to buy, replace, and upgrade furniture, appliances, and all buys outside the operating budget; always be saving regularly for these specific items.

At least yearly, do a budget for potential buys, other than your private dwelling, with individual values over $100 (or other amount you decide), and with a life around two years or longer. For each item, estimate the following:

1. Today’s value of the likely replacement cost of the item ($12000)
2. How long before you might replace the item (6 years)
3. Yearly amount to save: divide one by two, and divide the result by 12 for monthly amount to save ($2000 and $167)

Remember, for buys other than your home, affordable means ability to pay for an item and not take on debt, and not compromise current and projected household budgets, plans and commitments.

Understanding compound interest as it applies to loans, and knowing how much you spend for interest on non mortgage loans, might motivate you to focus on affordability before spending!

In part two, I examine affordability and buying a private dwelling; what it means to not compromise budgets, plans, and commitments, before answering the two remaining questions:

1. Who decides affordability?
2. What should happen to people living in homes they can’t afford?

Copyright (c) 2011, Michel A. Bell