Solutions to Make Better Decisions with Your Money

Set a Budget: The Gap Between What You Can Afford and What You Want

The Gap Between What You Can Afford and What You Want - TaxACT

Do you head into a purchase with a budget but end up spending far more than that amount?

Here’s a theory…

The gap between what you can afford and what you want can be measured by how well aspirational marketing works on you.

If aspirational marketing works well on you, (read: Real Housewives, Dom Perignon and other symbols of conspicuous consumption) there will always be a large gap between what you can afford and what you want or desire.

But if aspirational marketing barely makes you bat an eyelash, there is hardly ever a gap between what you want and what you can afford.

It’s easy to get caught in that gap, though. And if you do, you might end up swimming in debt or payments way past your comfort zone.

Here are a few big gaps to avoid:

Know your comfort zone and stick to a budget

Have you ever wanted to buy a car and you say, yes, I am going to spend a reasonable $3,000 on a used Ford Escort?

You then find yourself wandering and looking at cars where the cost edges up higher and higher of your comfort zone until you have a copy of Car and Driver magazine in your hands and you’re actually considering buying a $72,000 Porsche Cayenne instead.

Does this sound familiar? Maybe not to this extreme, but it happens to the best of us.

It’s easy to get caught up in wanting something way out of your price range.

It’s fun to fantasize and imagine the smooth leather wrapped around the steering wheel or the walnut trim accenting your outfit.

If you decide to give into your wants, what is the cost to your financial future?

If you buy a car that is $20,000 more than you planned for, you might be able to finance it and it’s just a couple hundred dollars more each month.

That’s OK right? But what about a home?

In real estate, it might be a difference of $150,000.

Sure, you can get a mortgage, if you qualify, but you are now looking at an additional $720 in monthly payments. So with the new car and house you are now seeing nearly a thousand dollars in monthly payments you weren’t originally planning for.

What does an extra thousand dollars mean to you?

If you didn’t have to make payments, you could:

  • Invest an extra $1,000 per month
  • Host a fun, casual family event: bring a taco truck to the house or have an awesome barbeque for $300, and put the rest towards saving.
  • Take $500 each month and put it towards a different charity or cause, and invest the other $500
  • Buy one new pair of designer shoes or a designer handbag each month

Instead of giving into your wants, focus on setting a budget and live a little below your wants to create some cash flow.

Cash flow of $1,000 per month creates all kinds of new opportunities for you.

When making purchases, do you go in with a budget?

Photo credit: SeeMidTN.com (aka Brent) via photopin cc

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About SK

SK is the author of American Debt Project - Pay Off Debt and Live Your Life. Don't Compare, Contrast. Follow American Debt Project on Twitter andFacebook.