Woman Shopping - Holding Shopping Bags - Retail - Spending Money

What Does it Mean to be Able to Afford Something?


Most everyone will agree that you shouldn’t buy things that you can’t afford, yet so many do. Why is that? It seems to us that one of the reasons for this is because many don’t know what it means to be able to afford something. Spoiler alert – it doesn’t mean you have enough money in the bank or have just enough income to cover it.

Depending on your situation, it’s probably not worth a lot of stress in your life to ponder whether you can afford one brand of toilet paper over another. However, when it comes down to larger (e.g. home, car, education, wedding rings, etc.) or more discretionary (e.g. vacation, TV, home remodeling, etc.) purchases, you should always determine how much you can afford to spend before you spend it.

Although the focus of this article is on spending, note that some of the references to “spending too much money” may be substituted for “not making enough money”. Making and spending money are both part of the cash flow equation, so if you’re having a cash flow problem, you can solve this either by cutting spending and/or increasing income.


00:00:00,000 –> 00:00:13,960
Hey everybody, welcome back to the Bigger Insights Finance podcast where we’ll help

00:00:13,960 –> 00:00:17,200
you live a life you don’t need a vacation from.

00:00:17,200 –> 00:00:21,360
Most everyone will agree that you shouldn’t buy things you can’t afford, yet so many

00:00:21,360 –> 00:00:22,600
people do.

00:00:22,600 –> 00:00:24,160
Why is that?

00:00:24,160 –> 00:00:28,720
It seems to us that one of the reasons for this is because many don’t know what it means

00:00:28,720 –> 00:00:30,960
to be able to afford something.

00:00:30,960 –> 00:00:35,280
And spoiler alert, it doesn’t mean that you have enough money in the bank or that you

00:00:35,280 –> 00:00:38,920
have just enough income to cover it.

00:00:38,920 –> 00:00:42,960
In this episode, we’re going to give you some things to think about when you’re doing

00:00:42,960 –> 00:00:49,280
your budgeting, financial planning, or considering making a large purchase like a home, car,

00:00:49,280 –> 00:00:50,280
wedding, etc.

00:00:50,280 –> 00:00:55,840
I’m going to start this off with a personal story, but first, just bear in mind that this

00:00:55,840 –> 00:01:02,000
episode is for educational purposes only and is not financial or other advice.

00:01:02,000 –> 00:01:06,800
When I was in college, one of the things I noticed was that my friends had this burning

00:01:06,800 –> 00:01:10,800
desire to go out and buy a nice car when they graduate.

00:01:10,800 –> 00:01:16,040
Some even went so far as to convince a dealer to sell them a car on the promise that they

00:01:16,040 –> 00:01:19,920
would get a good job after they graduate in a few months.

00:01:19,920 –> 00:01:26,480
I did not do that, but instead opted to keep my beater until it became embarrassing and

00:01:26,480 –> 00:01:30,480
I had some concerns about how reliable it was going to be.

00:01:30,480 –> 00:01:35,640
So when that day finally came, I decided to buy a new car, but had a problem.

00:01:35,640 –> 00:01:37,920
How much car can I afford?

00:01:37,920 –> 00:01:41,440
I honestly had no way of answering this question.

00:01:41,440 –> 00:01:46,760
My income was pretty solid and my expenses were relatively low, so technically I could

00:01:46,760 –> 00:01:53,000
have “afforded” a pretty decent car. But you know what they say, “Just because

00:01:53,000 –> 00:01:55,920
you can, that doesn’t mean you should.”

00:01:55,920 –> 00:02:01,320
What I decided was that I should set my budget based on a share of my cash flow.

00:02:01,320 –> 00:02:05,560
Alright, that’s cool and all, but what even is my cash flow?

00:02:05,560 –> 00:02:11,440
I had a rough idea in mind, but when I actually sat down to calculate it, the real number

00:02:11,440 –> 00:02:14,520
was significantly less than I thought.

00:02:14,520 –> 00:02:19,800
This is a life lesson for the one or two of you who actually listened to this podcast.

00:02:19,800 –> 00:02:24,520
If you’re going to base financial decisions on your cash flow, make sure you sit down

00:02:24,520 –> 00:02:29,600
and calculate and be honest about what that number actually is.

00:02:29,600 –> 00:02:35,080
The mistake that I made and a lot of other people make is that I was just casually ignoring

00:02:35,080 –> 00:02:37,360
intermittent expenses.

00:02:37,360 –> 00:02:41,800
So when you think about your cash flow, what comes to mind?

00:02:41,800 –> 00:02:49,200
Mortgage or rent payments, food and energy, phone bill, OnlyFans, you know, the necessities.

00:02:49,200 –> 00:02:54,040
That’s a great place to start, but you also need to factor in intermittent expenses like

00:02:54,040 –> 00:03:00,280
buying a new car, replacing your roof, replacing your HVAC equipment and so on.

00:03:00,280 –> 00:03:05,000
That might sound obvious to you, but it seems to us that very few people do this because

00:03:05,000 –> 00:03:11,200
if you actually sit down and analyze how they manage their finances, their decisions essentially

00:03:11,200 –> 00:03:15,200
take only their regular expenses into account.

00:03:15,200 –> 00:03:19,800
It’s very obvious that this is what they’re doing because anytime something breaks, there’s

00:03:19,800 –> 00:03:22,520
no money to fix or replace it.

00:03:22,520 –> 00:03:28,440
You know, what was your strategy – that everything would be okay as long as nothing bad ever

00:03:28,440 –> 00:03:31,000
happens and nothing breaks?

00:03:31,000 –> 00:03:35,640
So when you calculate your cash flow, make sure you’re accounting for future intermittent

00:03:35,640 –> 00:03:37,440
expenses as well.

00:03:37,440 –> 00:03:41,680
Personally, I have a workbook where I project these things.

00:03:41,680 –> 00:03:47,040
It includes not only my regular expenses, but everything from buying a new car every

00:03:47,040 –> 00:03:53,080
X number of years, to replacing the car’s batteries and tires, buying new computers,

00:03:53,080 –> 00:03:55,200
NAS systems, etc.

00:03:55,200 –> 00:03:57,080
It is pretty straightforward.

00:03:57,080 –> 00:03:59,720
I calculate this on a monthly basis.

00:03:59,720 –> 00:04:05,320
So if I need to, for example, renew my driver’s license every four years, I just divide the

00:04:05,320 –> 00:04:08,000
expense by 48 months.

00:04:08,000 –> 00:04:14,000
You should really do this as well because depending on your situation, these other expenses that

00:04:14,000 –> 00:04:19,120
might not be on your radar could be costing you hundreds or thousands of dollars per

00:04:19,120 –> 00:04:21,840
month over the long run.

00:04:21,840 –> 00:04:25,640
So now let’s talk about how much you can afford to spend.

00:04:25,640 –> 00:04:30,280
This is a highly personal matter, which if you’re not familiar with our work, we help

00:04:30,280 –> 00:04:35,120
our clients with issues like this in one-on-one consulting sessions.

00:04:35,120 –> 00:04:38,680
Those are done almost entirely over the internet, by the way.

00:04:38,680 –> 00:04:42,840
So don’t think that we can’t help you if you’re not in the Cincinnati area like we

00:04:42,840 –> 00:04:43,840

00:04:43,840 –> 00:04:50,160
But how much you can or should spend depends on a number of factors like your age, goals,

00:04:50,160 –> 00:04:58,840
income, assets, liabilities, family situation, health situation, risks, and risk tolerance.

00:04:58,840 –> 00:05:03,560
With regard to risk, we believe this is one of the biggest factors that people tend to

00:05:03,560 –> 00:05:07,360
ignore, which leads them to overspend.

00:05:07,360 –> 00:05:09,720
Ask yourself these questions.

00:05:09,720 –> 00:05:10,720

00:05:10,720 –> 00:05:16,960
Will I be okay if I get laid off and it takes a while to find a new job or start a business?

00:05:16,960 –> 00:05:17,960

00:05:17,960 –> 00:05:20,280
What if my spouse divorces me?

00:05:20,280 –> 00:05:21,280

00:05:21,280 –> 00:05:24,480
What if I have a serious health issue?

00:05:24,480 –> 00:05:25,480

00:05:25,480 –> 00:05:28,280
What if I have an unexpected child?

00:05:28,280 –> 00:05:29,520

00:05:29,520 –> 00:05:35,080
Is your wealth growing fast enough to afford a decent retirement?

00:05:35,080 –> 00:05:36,080
And so on.

00:05:36,080 –> 00:05:42,480
Do you have the assets and insurance to help prevent these kinds of issues from bankrupting

00:05:42,480 –> 00:05:43,480

00:05:43,480 –> 00:05:47,840
If not, we’re is the opinion that you’re already spending too much money because chances

00:05:47,840 –> 00:05:53,000
are you’re going to run into some of these issues at some point in the future.

00:05:53,000 –> 00:05:55,700
Goals are another area of concern.

00:05:55,700 –> 00:06:00,800
You may not have a solid financial plan, but you probably have some idea as to what

00:06:00,800 –> 00:06:05,400
you want or what you think your financial future should look like.

00:06:05,400 –> 00:06:10,720
We can sit down with you and help you quantify this, but let’s suppose for the sake of example

00:06:10,720 –> 00:06:16,640
that you need to be saving and investing about $5,000 per month to meet your financial

00:06:16,640 –> 00:06:17,880

00:06:17,880 –> 00:06:23,360
That might sound like a lot, but when you consider how many people are approaching retirement

00:06:23,360 –> 00:06:28,440
age and have no retirement savings, even that might not be enough.

00:06:28,440 –> 00:06:33,440
But anyway, let’s say that you’re really only saving $2,000 per month.

00:06:33,440 –> 00:06:39,180
Many people would see that and think that you have $2,000 a month that you can afford

00:06:39,180 –> 00:06:40,680
to spend.

00:06:40,680 –> 00:06:42,520
We don’t see it that way.

00:06:42,520 –> 00:06:49,320
In your case, you either need to cut your spending by $3,000 per month and/or increase

00:06:49,320 –> 00:06:53,160
your income to hit that $5,000 target.

00:06:53,160 –> 00:06:55,520
This is a very serious issue.

00:06:55,520 –> 00:07:02,680
I believe I read somewhere that you and a spouse need something like $350,000 in retirement

00:07:02,680 –> 00:07:06,280
to cover medical expenses alone.

00:07:06,280 –> 00:07:08,440
So take this very seriously.

00:07:08,440 –> 00:07:12,440
You can F around today, but you’re eventually going to find out.

00:07:12,440 –> 00:07:15,480
Now let’s talk about how you make your money.

00:07:15,480 –> 00:07:21,760
This is important because believe it or not, a lot of people hate their jobs, work an unsustainable

00:07:21,760 –> 00:07:27,600
number of hours, or make their money using skills that are soon to become obsolete.

00:07:27,600 –> 00:07:31,760
If that describes you in any way, you really need to be careful.

00:07:31,760 –> 00:07:38,080
We see this a lot with professional athletes, people in the adult film industry and so on.

00:07:38,080 –> 00:07:43,720
They make good money, but their income situation is rather “transitory”, as Jay Powell might

00:07:43,720 –> 00:07:44,720
put it.

00:07:44,720 –> 00:07:49,880
They don’t take that very seriously, spend like Congress, then are shocked to find out

00:07:49,880 –> 00:07:54,920
that they’re broke as a joke when they get a little bit older and can no longer perform.

00:07:54,920 –> 00:08:00,120
But it’s not just ballplayers and adult film stars that should be concerned about this.

00:08:00,120 –> 00:08:06,360
If your job requires hard labor or takes a large toll on your body, you need to account

00:08:06,360 –> 00:08:11,280
for the possibility that you may not be able to work as long as you’d like.

00:08:11,280 –> 00:08:15,800
But even white collar workers should be thinking about this as well.

00:08:15,800 –> 00:08:18,800
What if ChatGPT replaces you?

00:08:18,800 –> 00:08:23,640
What if you work in the crypto industry and it gets crushed by Big Brother? You need

00:08:23,640 –> 00:08:27,080
to be asking yourself these kinds of questions.

00:08:27,080 –> 00:08:31,480
One of our favorite justifications we hear is, “I deserve it.”

00:08:31,480 –> 00:08:36,800
“I bought my ‘forever home’ because I deserve it.”

00:08:36,800 –> 00:08:40,080
That makes me cringe when I hear this.

00:08:40,080 –> 00:08:44,600
Whenever someone tells me that they bought or they’re buying their “forever home”, I’m

00:08:44,600 –> 00:08:48,760
thinking to myself, “You’re buying being forever in debt.

00:08:48,760 –> 00:08:53,680
That’s what you’re buying.” Because what they mean when they say this is, “Yeah, I’m spending

00:08:53,680 –> 00:08:58,280
way too much on this, but I plan on being here for a while, you know, as long as

00:08:58,280 –> 00:09:03,200
nothing bad happens, in which case, I’ll probably go bankrupt and live under a bridge.”

00:09:03,200 –> 00:09:05,200
That’s what they’re actually saying.

00:09:05,200 –> 00:09:09,440
But let me go back and talk more about working long hours.

00:09:09,440 –> 00:09:14,400
When people buy their “forever home” or just spend too much money in general, they often

00:09:14,400 –> 00:09:20,440
compensate for this by working more hours. And we really don’t like this strategy for

00:09:20,440 –> 00:09:21,760
a few reasons.

00:09:21,760 –> 00:09:25,400
1. You’re going to suffer from burnout eventually.

00:09:25,400 –> 00:09:30,320
2. You’re going to get absolutely hosed on taxes.

00:09:30,320 –> 00:09:35,840
And 3. When you’re experiencing pre-burnout, you’re going to start splurging on things

00:09:35,840 –> 00:09:43,040
like Teslas, homes you can’t afford, $3,000 massage chairs, boats, etc.

00:09:43,040 –> 00:09:46,440
because you work really hard and “deserve it.”

00:09:46,440 –> 00:09:47,440

00:09:47,440 –> 00:09:52,480
And when people do this, the expenses and taxes pile up.

00:09:52,480 –> 00:09:53,720
So what do they do?

00:09:53,720 –> 00:09:54,800
They work harder.

00:09:54,800 –> 00:09:59,520
They work more hours, which just reinforces this spending doom loop.

00:09:59,520 –> 00:10:01,120
You see what I mean?

00:10:01,120 –> 00:10:06,000
Stop buying things just because you feel like you deserve to treat yourself and instead

00:10:06,000 –> 00:10:11,960
focus on a plan. Because if you don’t, you’re at high risk of waking up someday in your

00:10:11,960 –> 00:10:19,760
40s or 50s and switch your mindset from, “I deserve a $3,000 massage chair” to, “Holy crap,

00:10:19,760 –> 00:10:22,600
I’m never going to be able to retire.”

00:10:22,600 –> 00:10:26,900
Now let’s talk about need versus afford.

00:10:26,900 –> 00:10:31,840
Sometimes we see clients and others spending too much on things they “need”, or they think

00:10:31,840 –> 00:10:38,560
they need. Because they need those things, the price becomes no object.

00:10:38,560 –> 00:10:44,840
Unfortunately, it is the case that at times we do need things that we can hardly afford,

00:10:44,840 –> 00:10:50,040
but that shouldn’t be used as an excuse to drop the ball on your financial planning.

00:10:50,040 –> 00:10:55,040
So you might be living in an expensive area and spending half of your income on rent,

00:10:55,040 –> 00:11:00,180
for example. You might be thinking to yourself, “Well, I need a place to stay.

00:11:00,180 –> 00:11:01,640
So it is what it is.

00:11:01,640 –> 00:11:05,040
I can’t get ahead because of greedy landlords.”

00:11:05,040 –> 00:11:10,880
Well, it is true, you do need a place to live, but is there really nothing you can do about

00:11:10,880 –> 00:11:11,880

00:11:11,880 –> 00:11:15,920
Perhaps you could work extra hours or build a side hustle.

00:11:15,920 –> 00:11:18,160
Can you move to a cheaper area?

00:11:18,160 –> 00:11:22,240
Can you prepare your own meals rather than using DoorDash?

00:11:22,240 –> 00:11:27,680
These are the questions you should be asking rather than just say, “It is what it is.”

00:11:27,680 –> 00:11:33,320
And along these lines, are your needs actually needs or are they wants?

00:11:33,320 –> 00:11:39,600
Have you ever noticed how a lot of couples rush out to buy a nice seven-seater van or

00:11:39,600 –> 00:11:46,720
SUV immediately after having their first child or in some cases before it’s even born?

00:11:46,720 –> 00:11:48,320
Do you really need that?

00:11:48,320 –> 00:11:50,880
Does that expense actually make sense?

00:11:50,880 –> 00:11:57,720
Do you really need to buy a $1,200 phone every two years or a $2,000 MacBook to check

00:11:57,720 –> 00:12:04,440
your email, watch TikTok videos, and post bathroom selfies on Instasham?

00:12:04,440 –> 00:12:05,440
Probably not.

00:12:05,440 –> 00:12:10,800
So before you write off these expenses as fixed, check your assumptions.

00:12:10,800 –> 00:12:15,880
Of course, no one ever got rich by pinching pennies, but being wasteful isn’t going to

00:12:15,880 –> 00:12:18,360
fulfill your dreams either.

00:12:18,360 –> 00:12:23,280
Now let’s talk about dealing with salesmen because they can be very effective at getting

00:12:23,280 –> 00:12:25,920
people to spend more than they should.

00:12:25,920 –> 00:12:28,880
A salesman’s job is to make sales.

00:12:28,880 –> 00:12:32,840
It’s your job to do what’s in your best interest.

00:12:32,840 –> 00:12:38,040
When you deal with salesmen, you’ll hear things like, “Oh, based on your income, your home

00:12:38,040 –> 00:12:47,840
should be about $450,000.” Or “You can afford this $50,000 car”. Or “If you’re having trouble

00:12:47,840 –> 00:12:53,760
coming up with a down payment, take a loan out on your 401k!” “Or your engagement ring should

00:12:53,760 –> 00:12:57,160
be 20% of your annual salary.”

00:12:57,160 –> 00:12:59,240
Have you heard some of these before?

00:12:59,240 –> 00:13:05,200
The problem with this is that the salesman doesn’t know your situation or your goals.

00:13:05,200 –> 00:13:10,640
His only concern is making the sale and whether you’re going to be able to pay.

00:13:10,640 –> 00:13:17,600
If closing that transaction wrecks your finances, that’s not on him, that’s on you.

00:13:17,600 –> 00:13:22,840
One of the ways to help with this is to think about what you need and how much you should

00:13:22,840 –> 00:13:25,880
spend before you go shopping.

00:13:25,880 –> 00:13:29,800
This goes back to my situation when I was in the market for a car.

00:13:29,800 –> 00:13:35,000
I had some models in mind and a budget and I stuck to it,

00:13:35,000 –> 00:13:37,520
salesman gimmicks not withstanding.

00:13:37,520 –> 00:13:42,960
So when you go to the dealer to buy a car, come prepared. And if some new information

00:13:42,960 –> 00:13:48,400
comes to light, you can always sleep on it rather than make a knee-jerk decision.

00:13:48,400 –> 00:13:52,880
The second tip is to know who the salesman are.

00:13:52,880 –> 00:13:56,840
A salesman doesn’t always have “sales” in their title.

00:13:56,840 –> 00:14:02,200
As far as we’re concerned, anyone who’s trying to encourage you to spend money at their business

00:14:02,200 –> 00:14:04,200
is a salesman.

00:14:04,200 –> 00:14:08,120
There’s nothing wrong with that, but the point is that you need to understand what their

00:14:08,120 –> 00:14:12,800
motivations are and challenge what they’re telling you.

00:14:12,800 –> 00:14:19,960
So this will include insurance agents, realtors, mortgage brokers, bankers, and sometimes even

00:14:19,960 –> 00:14:24,840
professionals that should be looking out for your best interest rather than just trying

00:14:24,840 –> 00:14:27,080
to rack up sales.

00:14:27,080 –> 00:14:32,040
Sometimes we’ll see doctors and lawyers, for example, suggesting services that you don’t

00:14:32,040 –> 00:14:38,160
really need or that aren’t appropriate for your situation just to make those sales.

00:14:38,160 –> 00:14:42,440
And you might not think of those people as salesmen, but they are.

00:14:42,440 –> 00:14:47,760
Take realtors, for example, making tens of thousands of dollars to list your home and

00:14:47,760 –> 00:14:50,920
show up at closing to take their check.

00:14:50,920 –> 00:14:57,400
I was talking to a realtor once and I asked him why so many buyer’s offers do this little

00:14:57,400 –> 00:15:03,920
gimmick where they offer a high price, but with the seller chipping in closing costs.

00:15:03,920 –> 00:15:13,640
So an offer on your house might be $510,000, but you pay $10,000 for closing costs.

00:15:13,640 –> 00:15:16,840
And you think to yourself, “Well, what’s the point in that?

00:15:16,840 –> 00:15:21,000
Why not just make it $500,000 because that’s what it is.”

00:15:21,000 –> 00:15:26,600
So I asked my realtor about this and he gave me some BS reason that made absolutely no

00:15:26,600 –> 00:15:27,600

00:15:27,600 –> 00:15:33,640
The real reason is because that it inflates the sales price, which is what the commission

00:15:33,640 –> 00:15:35,120
is based on.

00:15:35,120 –> 00:15:41,120
So your realtor and the buyer’s realtor have this little scam going where they try to pump

00:15:41,120 –> 00:15:47,680
up the price at your expense, which results in you walking away with less money.

00:15:47,680 –> 00:15:55,520
Now keep in mind that this person is supposed to be representing you, but again, they’re salesmen.

00:15:55,520 –> 00:16:00,120
And if you’re not following what I’m saying, here’s how this little scam works.

00:16:00,120 –> 00:16:07,240
So if you accept that offer, the agents would split their commission on a $510,000 sale,

00:16:07,240 –> 00:16:14,400
even though the sale is really only for $500,000 on net. At a 6% commission that allows them

00:16:14,400 –> 00:16:21,160
to scam an extra $600 out of you, the seller, for no reason whatsoever.

00:16:21,160 –> 00:16:26,680
And by the way, that might also mean more transfer taxes to the county, depending on

00:16:26,680 –> 00:16:28,200
where you live.

00:16:28,200 –> 00:16:31,280
Aren’t realtors great? They’re just looking out for you.

00:16:31,280 –> 00:16:36,640
But seriously, someone really needs to investigate this whole racket, let’s be honest.

00:16:36,640 –> 00:16:43,000
But anyway, tip number three, be very wary of letting salesmen or financial gurus tell

00:16:43,000 –> 00:16:49,320
you that you should be spending amounts on your home, car, and other large items as a

00:16:49,320 –> 00:16:52,120
percentage of your income.

00:16:52,120 –> 00:16:56,920
One of the things that makes financial planning so tedious is that everyone’s situation is

00:16:56,920 –> 00:16:58,280

00:16:58,280 –> 00:17:03,120
So when a salesman tells you that you should be spending 30% of your income on housing,

00:17:03,120 –> 00:17:09,680
for example, if anything, you should see that as more of a limit rather than a target.

00:17:09,680 –> 00:17:16,800
But from our observation, people see these kinds of rules of thumb as targets, not limits.

00:17:16,800 –> 00:17:22,160
So if a salesman tells you that your engagement ring should be 20% of your income, and you

00:17:22,160 –> 00:17:30,000
make $100,000, if you’re like most people, you’d be thinking, “What can I get for $20,000?”

00:17:30,000 –> 00:17:36,580
We don’t recommend these kinds of mental gimmicks because again, everyone’s situation is different.

00:17:36,580 –> 00:17:43,480
We hear this 30% rule for housing a lot, but that may be too much for your situation.

00:17:43,480 –> 00:17:50,760
Given your goals, assets, liabilities, etc., maybe you can only afford to spend 20%.

00:17:50,760 –> 00:17:57,340
Maybe you really can afford 30%, but you’d be just as happy spending 20%, in which case

00:17:57,340 –> 00:18:02,080
if you did spend the 30%, you would have an opportunity cost.

00:18:02,080 –> 00:18:07,360
If you’re not going to develop a comprehensive financial plan, we’re a fan of the following

00:18:07,360 –> 00:18:09,280
alternative strategy.

00:18:09,280 –> 00:18:16,200
Buy what you need and spend the minimum amount that you require to be happy, focused, and

00:18:16,200 –> 00:18:17,520

00:18:17,520 –> 00:18:24,240
Take everything else and manage it wisely, which is out of scope for this episode.

00:18:24,240 –> 00:18:26,800
That’s a whole discipline all by itself.

00:18:26,800 –> 00:18:31,480
But trust me when I say that if you do that, you’ll sleep better at night knowing that

00:18:31,480 –> 00:18:37,600
you have assets that are growing and providing you with income and stability in the face

00:18:37,600 –> 00:18:39,280
of uncertainty.

00:18:39,280 –> 00:18:44,440
That’s something that you really can’t appreciate until you experience it, but I promise you

00:18:44,440 –> 00:18:45,960
that it’s real.

00:18:45,960 –> 00:18:52,760
We also hear a lot of this ancient principle of saving 10% of your income without exception.

00:18:52,760 –> 00:18:58,900
I actually read about this in the book, The Richest Man in Babylon, which is a great book.

00:18:58,900 –> 00:19:02,960
You should read that or listen to it on YouTube if you can’t read.

00:19:02,960 –> 00:19:07,640
For you Friends fans out there, this was actually the advice that Monica’s dad gave

00:19:07,640 –> 00:19:08,640
to her.

00:19:08,640 –> 00:19:11,560
“10% of your paycheck, where does it go?

00:19:11,560 –> 00:19:12,560
In the bank.”

00:19:12,560 –> 00:19:19,400
Now, obviously 10% is better than 0%, but this stuff really grinds our gears because

00:19:19,400 –> 00:19:24,680
what these gimmicks really do is they shut down the thinking process.

00:19:24,680 –> 00:19:30,040
For you, 10% may not even be close enough to meet your financial goals.

00:19:30,040 –> 00:19:35,120
But when Monica’s dad tells you that this is what you should be doing, and you do it

00:19:35,120 –> 00:19:38,560
like a good little girl, where does that leave you?

00:19:38,560 –> 00:19:44,560
You’re screwed, but you don’t realize it because you’ve offloaded your responsibility to manage

00:19:44,560 –> 00:19:48,240
your finances onto this arbitrary rule.

00:19:48,240 –> 00:19:51,840
We don’t give any such rules to our clients.

00:19:51,840 –> 00:19:58,320
We help them develop a real financial plan that actually requires some thought and monitoring

00:19:58,320 –> 00:20:00,560
to help make sure that they’re on track.

00:20:00,560 –> 00:20:05,840
All right, so to start wrapping this up, here are our final thoughts.

00:20:05,840 –> 00:20:12,040
How much you can afford to spend is a highly personal matter that extends far beyond what

00:20:12,040 –> 00:20:16,240
your income is or how much cash you have in the bank.

00:20:16,240 –> 00:20:19,160
Let me give you some final points to consider.

00:20:19,160 –> 00:20:25,040
1. What you’re earning or spending today is only part of the equation.

00:20:25,040 –> 00:20:30,320
If you’re not adequately preparing for tomorrow’s challenges, how much cash flow you have today

00:20:30,320 –> 00:20:32,160
is highly misleading.

00:20:32,160 –> 00:20:39,160
2. I can tell you from personal experience in dealing with high spenders that your spending

00:20:39,160 –> 00:20:44,920
can have a detrimental impact on your relationships and those around you.

00:20:44,920 –> 00:20:51,000
3. When it comes to age, people have their spending habits backwards.

00:20:51,000 –> 00:20:56,480
The younger you are, the less you should be spending because you have time and compounding

00:20:56,480 –> 00:21:00,240
on your side and you have much longer to live.

00:21:00,240 –> 00:21:02,120
So think about that for a second.

00:21:02,120 –> 00:21:07,800
If you’re 95, yes, you can spend money like a drunken sailor because you probably don’t

00:21:07,800 –> 00:21:09,600
have much time left.

00:21:09,600 –> 00:21:16,360
If you’re 25, you’ve got millions of dollars in expenses in the pipeline heading your way,

00:21:16,360 –> 00:21:19,720
so you should act and plan accordingly.

00:21:19,720 –> 00:21:25,040
Rather than listening to salesmen and financial gurus, you should be consulting with financial

00:21:25,040 –> 00:21:31,600
professionals to help you understand how your spending ties into your financial future.

00:21:31,600 –> 00:21:36,360
If you’re having a spending or budgeting problem, we’re here to help.

00:21:36,360 –> 00:21:42,840
We help clients like you meet their financial goals in one-on-one consulting sessions.

00:21:42,840 –> 00:21:48,040
If that sounds interesting to you, go to our website, biggerinsights.com, and fill out

00:21:48,040 –> 00:21:52,760
the short form at the bottom of the page so we can schedule your initial consultation.

00:21:52,760 –> 00:21:58,320
Otherwise, if you found this helpful, please consider making a contribution.

00:21:58,320 –> 00:22:02,440
We accept Monero (XMR), Bitcoin (BTC), and Litecoin (LTC).

00:22:02,440 –> 00:22:09,960
If your wallet supports OpenAlias, ours is contribute.biggerinsights.com.

00:22:09,960 –> 00:22:14,740
But if not, we’ll put a link to our Support Us page in the description.

00:22:14,740 –> 00:22:20,320
We used to put the wallet addresses directly in the description, but the Monero address

00:22:20,320 –> 00:22:26,560
is like a mile long and causes some text formatting issues, so we’ve removed them and we put them

00:22:26,560 –> 00:22:31,360
on our website instead, so you can go there and check that out if you’re interested.

00:22:31,360 –> 00:22:37,200
We are once again asking you to subscribe and share this podcast so that we can help

00:22:37,200 –> 00:22:39,800
as many people as we can.

00:22:39,800 –> 00:22:41,880
Thanks for staying until the end.

00:22:41,880 –> 00:23:11,360
Get your spending under control, stay healthy, and stay wealthy.


How Much Can You Afford to Spend?

This is a highly personal question and one that should definitely be discussed with your family and financial advisors. However, we can shed some light on how to go about determining how much you may want to be spending. How much you can or should be spending is largely based on your:

  1. Age
  2. Goals
  3. Income
  4. Assets
  5. Liabilities
  6. Family situation
  7. Health situation
  8. Risks
  9. Risk tolerance


Some of these are obvious, but others are often overlooked; leading to overspending. Take risks, for example – do you have the ability to absorb losses from being laid off, divorce, health issue, birth of an unexpected child, major home repair, or other setback? Do you and your spouse have life, health, car, home, accidental death and dismemberment, and disability insurance? Are your assets growing at a fast enough pace to provide the life you want in retirement? If not, you’re already spending more than you can afford because you’re all but guaranteed to encounter some of these. It’s more a question of when than if.


Goals are another common area of concern. We all want to be wealthy, which is a fine goal to have. But this is little more than a pipe dream if you don’t understand what saving and investing will be required to make that a reality. Let’s say you should be saving and investing $5,000 per month in order to meet your goals, but you’re only managing $2,000. How much can you afford to spend? Most would see that $2,000 and say “About $2,000”, which is why living paycheck-to-paycheck is so common. But the reality is you’re already spending way too much or earning too little. We would argue that you can afford -$3,000 per month and need to cut expenses and increase your income ASAP to fill the gap.

How You Make Money

Beyond your cash flow, you should also consider how you make money. You may have sufficient cash flow now, but that should be of little comfort if you hate your job, work long hours, or make the bulk of your money using skills that are soon to become obsolete. Do your best to determine how sustainable your income situation is before you blindly decide that everything is and will remain on-track.

"I Deserve It"

Many spend too much money because they work hard and “deserve” the nice things they buy. Being able to afford something is an issue of math, not one of your feelings. Whether you deserve something is immaterial if acquiring it comes at the cost of what you need or deserve in the future.

This is a trap that employees commonly fall into. Because they don’t understand the tax code and how this applies to different types of income (see The Three Types of Income), the harder they work, the more they pay in taxes. Their response to this is almost always to work harder. In a vain attempt to make their efforts feel worthwhile, they spend lavishly on homes, cars, boats, vacations, and other liabilities; only to find themselves needing to work harder to keep up.

Need vs. Afford

What you need and what you can afford are different things. At times, we may need things that we cannot afford, but that doesn’t mean you should ignore the fact that you’re spending more than you should or not earning enough to meet your needs. This sort of cognitive dissonance is common among those who live in an expensive area. The logic goes “Well, my rent is 50% of my income, but I need a place to live, so there’s nothing I can do about that. I can’t get ahead because of greedy landlords.” It’s true that you need a place to live, but there’s always something you can do to take control of your financial future:

  1. Can you find a way to make more money?
  2. Can you move to a cheaper area?
  3. Are there expenses you can cut?
  4. Can you move in with your parents, grandparents, or friends?
  5. Can you do work for your landlord in exchange for lower rent?

Needs are often subjective – do you really need:

  1. A platinum limited edition 7-seater to transport your only child?
  2. All of your kids to have separate bedrooms?
  3. To fund your child’s college education?
  4. To buy a new cell phone every 1 to 2 years?
  5. A $2,000 laptop to check email and social media?

Of course, wealth doesn’t typically come to those with a scarcity mindset. However, being wasteful when you’re trying to get ahead isn’t wise either. If you start thinking about what your goals are, and what you need to do in order to achieve them, you will likely find that what you thought you needed is not actually the case.

Allowing Salesmen to Tell You What You Need or How Much You Can Afford

A salesman’s job is to sell. It’s your job to make sure that what you’re doing is in your best interest. This is obvious, but we see people spend too much money on homes, cars, etc. because they took the advice of the person selling to them. A salesman will tell you things such as:

  1. “Based on your income, your home should be about $450,000”
  2. “You can afford this $50,000 car”
  3. “If you’re having trouble coming up with the down payment, take a loan out on your 401(k)”
  4. “The engagement ring should be 20% of your annual salary”

These are bold and irresponsible statements that may be horrible advice depending on your situation. Below are some tips to help you avoid falling into these traps.

Before You Shop

Before you go shopping, establish and stick to a set of requirements for what you need as well as a budget. This will empower you to remain objective and stick to your plan. If new information comes to light, take time to think about it before making a rash decision. This may require sleeping on it.

Know the Salesmen

Understand who the salesmen are. Many will not have “Sales” in their title, but pretty much anyone you talk to who will help you spend money is a salesman. Warren Buffett summarized this quite well by stating, “Never ask an insurance salesman if you need insurance.” This includes insurance agents, real estate agents, mortgage brokers, bankers, and occasionally shady professionals that are supposed to be looking out for your best interests – e.g.:

  1. Your attorney may recommend services or strategies that aren’t appropriate for your situation
  2. Your doctor may recommend procedures, tests, devices, or medications that you don’t really need

Spending as a Percentage of Your Income

Looking at spending as a fixed percentage of your income is a recipe for living paycheck-to-paycheck. Salesmen and financial gurus love talking about saving and spending as a fixed percentage of your income, but this is dubious because there are many other factors to consider than just your income. For you, spending 30% of your income on housing may make sense. For your neighbor who is making the same amount, 30% may be way too much.

One obvious flaw in this logic is that this may encourage you to spend more than you otherwise would. Perhaps you and your spouse would be happy living in a home that costs only 20% of your income. However, when the financial gurus say your housing should be 30% of your income, this will translate to “we should buy a nicer home” for many.

We often hear that you should save 10% of your income. Why 10%? On what logic is 10% the right number for you? Depending on your situation, maybe you should be saving and investing 50%, so if you’re saving 10%, where does that leave you? 10% is a small number, especially after inflation takes its toll.

Personally, we hate hearing these rules of thumb because we see that they shut down the thinking process for those who are most in need of thinking critically about their financial situation. “The lady at the bank said we can afford it, so we should be good.” No! The lady at the bank’s only concern is whether you’re going to make the payments! Is she going to be there for you when you’re washing dishes for a living at age 70 because you spent too much money? Of course not.

Final Thoughts

How much you can afford to spend is a highly personal matter that extends far beyond what your income is. Rather than listening to salesmen and financial gurus, you should be consulting with financial professionals to help you understand how your spending ties into your financial future.

Understand that:

  1. What you’re earning and spending today is only part of the equation. If you’re not adequately preparing for tomorrow’s challenges, how much cash flow you have today is highly misleading.
  2. Your spending can have a major impact on those around you, as well as a source of strain in your relationships
  3. The younger you are, the less you should be spending because:
    1. This better allows you to take advantage of the power of compounding
    2. The younger you are, the greater your expenses are expected to be between now and when you die

If you’re having a spending or budgeting problem, we’re here to help. We help clients like you meet their financial goals in one-on-one consulting sessions. If that sounds interesting to you, fill out the short form at the bottom of the page so we can schedule your initial consultation.

Support Us

We’re an ethical company that puts our community first. You won’t find us injecting targeted ads or trackers into our website, peddling sketchy products/services, or selling our visitors’ data to 3rd-parties. As a result, our visibility and resources are rather limited.

Please consider supporting us to help keep our mission going. There are several ways to make a difference – from cryptocurrency contributions to simply sharing our content. Every bit of support is greatly appreciated and helps us make the world a more private, secure, and prosperous place.

More Great Content

  • All
  • Finance
  • Privacy & Security
  • Technology
Finance - Budgeting - Financial Planning - Accounting - Asset Allocation - Taxable and Tax-favored Accounts - Cash Finance

Asset Location: Taxable vs. Tax-favored Accounts (401k, IRA, HSA)

Asset Location (AKA Asset Placement) is a strategy for organizing your assets in an optimal way that helps you meet your financial goals. In the previous episode, we focused on asset location strategies for reducing taxes and simplifying your tax return. In this episode, we focus on asset location considerations ...
Continue →
Security - Software - Email - Computer Screen Privacy & Security

Email is Insecure – Here’s How to Improve Email Security

Email was never designed to be private or secure, so not surprisingly, it is neither private, nor secure. In the previous episode, we explained the reasons why as well as the risks inherent to email. However, email is so prevalent that it is unfortunately a necessary evil. In this episode, ...
Continue →
Planning - Concepting - Whiteboard - Tax Planning Tips - Asset Location - Asset Placement Finance

Asset Location: Reducing Taxes & Simplifying Your Tax Return

Asset Location (AKA Asset Placement) is a strategy for organizing your assets in such a way as to reduce tax burden, simplify your tax return, and manage risk. We discuss our Asset Location strategies, which includes specifics about tax treatment for growth stocks, dividend stocks, taxable bonds, real estate investment ...
Continue →
Drake - Bad Choice-Good Choice - Linux vs Windows macOS ChromeOS Technology

Linux Doesn’t Suck – Here’s Why Even Normies Should Use It

Linux has long been viewed as a science fair project for nerds. We explain why Linux doesn’t suck and why it's now usable even for normies. Some of the items discussed: Issues with Windows, ease of use, performance (efficient use of resources), hardware support, application support, OS licensing, concerns about ...
Continue →
Email - Mobile Phone - Privacy and Security - Technology - Hands Privacy & Security

Email is Insecure – Stop Using it for Sensitive Communications

Email is the primary means of sending messages and documents for many people. Unfortunately, email was never designed to be private or secure. Over time, we’ve developed several tools and techniques to help make it more secure. But at the end of the day, no matter how uncomfortable it makes ...
Continue →
Cybersecurity - Privacy and Security - Virtual Private Network (VPN) Privacy & Security

Are Virtual Private Networks (VPNs) Useless Honeypot Scams?

You may have heard others in the privacy and security community call virtual private networks (VPNs) “useless”, “scams”, or “honeypots”, but is this actually the case? There are certainly a lot of sketchy VPNs and creators who shill them, but does that invalidate the thesis for using a VPN? We ...
Continue →
Scroll to Top