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Can I Afford It?
Throughout your financial life, you’ll need to ask if you can afford it or not. That ‘it‘ could be a new home, new car, new kid or school, bathroom remodel, expensive repair, etc.
Closely related is asking how much we can afford, and when. A cheaper used car might be the better choice than a new one. You might decide to push out buying a home a year or two after other expenses are paid off.
Spending money on a big expense now means less funds invested and growing for future expenses. Hence paying for a big expense now can make it hard to pay expenses decades later.
So, before we can properly answer ‘can I afford it?’ or ‘how much can I afford?’, we need to understand both our immediate and long-term plans as thoroughly as possible. By long-term, we mean 10, 20, or even up to 100 years into the future.
For example, for a thorough plan you need to consider monthly salary income stopping at retirement. You need to consider expenses increasing with inflation for years to come. Every car you replace every 10 years or so needs to be included. Same with replacing your home’s A/C unit and roof every decade or so. All your children and their educational and college expense needs must be considered as well.
Finally, you also need to track and forecast your accounts’ balances into the future:
- If a new prospective expense is too expensive, your forecast balances could go to $0.
- In this case, the answer to ‘can I afford it?’ would be ‘no!’.
FarPlanner lets you quickly build a thorough plan with all the above aspects considered. Then, within seconds you can see if you can take on your new proposed expense.
Download and start building your thorough and complex FarPlanner plan for free today, then see what you can afford.
Use Case: Can I afford a home?
Let’s dig deeper with a specific affordability use case with FarPlanner. Suppose you are planning to buy a home next year, and want to know if you can afford it. You know how much the house will likely cost based on location, square footage, etc.
FarPlanner lets you add graphical widgets to your overall financial plan called ‘trackers’. In this use case, we add a home asset group tracker to our plan, which lets to quickly change key things for your planned home purchase:
You can set your prospective home’s purchase amount, down payment %, mortgage APR & term, and fees. You can also estimate your home’s market value, which sets the asset value. You can also specify the property tax % at your location. This home asset tracker uses child trackers to mimic realistic home expenses, such as a new roof every 15 years.
Because FarPlanner lets you quickly simulate your entire plan in seconds, you can quickly answer ‘can I afford it’. If your plan goes red after you add the home to your plan, you might be short on funds:
FarPlanner let’s you play what-if games by editing your home widget, and then quickly re-simulating to show impacts. If you see a ‘red’ region, you could edit your home widget to lower the loan amount and home value. Or else delay buying the home for another year, or two.
Another what-if option is selecting a 15-year versus 30-year mortgage term. A 15-year mortgage has higher monthly payments but less interest payments. But a 30-year mortgage term has lower payments (with thousands more in expense payments overall). By simulating at least 30 years into the future, you’ll see if the lower 30 year payments term clears the ‘red’ or not.
A home mortgage calculator can help with comparing the mortgage term lengths. But as we’ve seen above, this calculation is not enough to answer ‘can you afford a home?’. Instead, your entire financial plan has to be simulated to estimate the ‘red’ zones when you might run out of funds.
Download and start building your thorough and complex FarPlanner plan for free today, then see what you can afford.