What the Word AFFORD Means to a Wealth Builder
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This week, I posted a video on how much car someone can afford.
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I expected to get some backlash. That comes with the territory of posting on social media.
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Instead, a barrage of comments came in on how out of touch my numbers were. Here are a few examples:
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I absolutely LOVE when this happens.β
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It helps me understand where true misconceptions are in personal finance. This list of comments shows one glaring issue: They all think you can afford something if you have enough money leftover in the bank to make the payments.
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Before we dive any deeper, let me show you the numbers I used in the video.
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First, we start with the premise: How much do you need to make to afford a $50,000 car?
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Then the numbers (which long-time listeners know this is just 20-4-7):
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- Down Payment: $10,000
- Interest: 6.5%
- Payment: $1,127
- Term: 4 Years
- To afford that payment, it needs to be 7% or less of your gross monthly income. This would be $16,100 per month or $193,200 per year.
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Saying someone needs to make $193K to afford a $50,000 car is what set people off.
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But if you want to build wealth, it is a number I think you should target.
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Why?
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Americans are drowning in debt. And I mean drowning.
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Most people will take on a huge car payment faster than they can decide on what they want for dinner.
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It all has to do with money psychology.
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Issue #1: βAffordβ does not mean you have enough money left over to a wealth builder.
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To afford something, you have to be taking care of your financial situation first. This can be things like:
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- Paying off consumer debt.
- Building a fully funded emergency fund.
- Investing for your retirement goals.
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Only after you do these things can you βaffordβ to take on something like a massive car payment. If you just use the money that you have leftover after paying your bills, you will never build wealth or have enough to retire.
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Issue #2: The Lack of Financial Discipline is Rampant.
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People will praise you for buying a new car on social media. But, if you tell them to pay off a depreciating asset, or not buy more car than they can afford, they lose their minds.
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I get it. Most of us donβt want to face the fact that we made a mistake. Even when we learn that it is a mistake after the fact.
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It is human nature to want to be right. So instead, we ignore it, or we move on.
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I want you to feel freedom with your money and not be restricted by debt payments on depreciating assets.
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Paid-off cars are a much bigger flex than thousand-dollar car payments. It is so important not to fall prey to this.
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Issue #3: You Need to Focus on Total Cost of Ownership.
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The total cost of ownership is all you as wealth builders should focus on. The monthly payment is what broke people will target, but the total cost of ownership shows the whole picture. This includes things like:
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- Depreciation
- Maintenance
- Insurance
- Repairs
- Fuel
- Taxes
- Finance Costs
- Fees
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When you focus on the total cost of ownership, you will know the true cost of everything you are buying, and it can sway your decision.
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It's all part of the bigger conversation we need to have about money, debt, and making choices that lead to building wealth.
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