It’s a financial trap many recent graduates who enter the workplace fall into, aided and abetted by various social constructs as well; you find yourself at the mercy of individuals and institutions you refer to as sellers and service providers by way of how you’re made to measure what affordability means. If you were to ask the typical working-class individual how they work out affordability, chances are they’ll make reference to a vaguely put-together formula which was engineered by those people who are only looking to squeeze as much profit out of you as possible.
It’s perhaps not an exact formula akin to one derived from something like first principles (in Mathematical Statistics), but rather something like how you’d believe you can afford to buy a certain vehicle based on the fact that your bank says you can by approving you for financing to buy that vehicle. This is the genesis of the widespread financial massacre we’re witnessing, albeit one which appears to be hidden in plain view and this is why most people live out their lives as economic slaves, without even knowing that that’s exactly what they are.
The 10% Net Worth Rule
There’ll naturally be many different opinions on this matter and there will most definitely be some people who totally disagree, but what you should consider is what motive those people have for either agreeing or disagreeing. Your bank for example – your bank doesn’t want to make you rich, but if you happen to find ways of building up wealth, then your bank wants you to keep your money with them so that they can use it to make more money for themselves.
So I can conclude with great certainty that any banking institution would disagree with the 10% net worth rule as a measure of affordability, but the guy who sells super yachts from his office situated on the French Riviera will agree 100% with the 10% net worth rule, which states that you can only truly afford something if its purchase doesn’t cost you more than 10% of your net worth. This applies to big assets as well, some of which assets are in actual fact liabilities, such as super yachts.
If it costs more than 10% of your net worth, you simply can’t afford it, certainly by the standards of those individuals who are looking to build wealth, at least.
Obviously there are exceptions to this rule, such as how buying a laptop might be a great investment in the early stages of the life of a freelancer who would need a good machine to do their work and thus earn their money. Discretion must always but always be exercised, although re-defining what affordability means in this way is every bit as necessary.
Generally if you can’t pay cash for it or if you can’t pay it off within a period of 36 months without it creating major financial problems for you, you simply can’t afford it. Face the truth and either aim for something a little lower-range or try to find ways to increase your income.