Beating Broke was included in three carnivals last week:

Yakezie Carnival – Daytona Edition hosted by Not Made of Money

Festival of Frugality #325 hosted by Debt Free by Thirty

Carnival of Financial Camaraderie #22 hosted by My University Money

Thanks to all hosts for including my posts!

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People use the term all the time when making purchases.  “I can afford it, so why not?”  they say as they sign the paper work for a new car, a new house, or swipe their credit cards for that fancy new television.  But, can they really afford it?  How do you define affordability?

Like many of you reading this, I’ve often defined affordability by whether I can make the payment or not.  It was while reading The Millionaire Fastlane that I read a passage that made me rethink how I define affordability.  The passage was this one:

Think about the last time you bought a pack of gum.  Did you fret over the price?  Did you ask, “Hmmm, can I afford this?” Probably not.  You bought the gum and it’s done.  The purchase had no impact on your lifestyle or your future choices.  To a rich man who walks into a dealership and buys a six-figure Bentley without thought, the acts are the same.

Affordability is when you don’t have to think about it.  If you have to think about “affordability,” you can’t afford it because affordability carries conditions and consequences.  If you buy a boat and resort to mental gymnastics over affordability, YOU CAN’T AFFORD IT.  Sure you can assuage affordability and make outlandish arguments, often starting with “I can afford this as long as…” [...]

This self-talk is a warning that you can’t afford it.  Affordability doesn’t come with strings attached.  You can bluff yourself but you can’t bluff the consequences.

So how do you know if you can afford it?  If you pay cash and your lifestyle doesn’t change regardless of future circumstances, you can afford it. In other words, if you buy a boat, pay cash, and are NOT affected by unexpected “bumps in the road,” you can afford it.  Would you regret a gum purchase if you lost your job a week later? Or if your sales forecast was slashed by 50%? Nope, it wouldn’t make a difference.  This is how affordability is measured against your level of wealth.

To overcome wealth impersonation, know what you can and can’t afford.  There is nothing wrong with buying boats and Lamborghinis if you can truly afford them.  There is a time and a place to indulge.

Reading that, and taking it to heart, it completely changes the perspective on what you can and cannot afford.  I have no problem affording the pack of gum, but I certainly couldn’t afford a boat.  In truth, I think it’s a bit of an extreme example, but one that we should probably strive for.

Think about some of the more recent purchases you’ve made and whether, using Demarco’s definition of affordability, you could really afford them or not.  I know that, if I use that definition, I certainly couldn’t afford the new (to me) car we bought a year ago.  The house we almost bought before I quit my job was absolutely out of our affordability range.  On the other hand, the new Blu-Ray player we bought to replace our dead DVD player was affordable, and, with kids, somewhat necessary.

In a way, Demarco’s definition of affordability matches up quite well with the cash-only lifestyle that many try and live.  If you can’t pay cash for it, you can’t afford it.  It’s a personal goal of mine to someday be able to live my financial life in that way.  I’d like nothing better to purchase our next car with cash.  Or, our next house.  Will it happen?  Realistically? Probably not.  But, it’s a goal, so we’re working towards it.

What about you?  How do you define affordability?  Does Demarco’s definition make sense to you?

photo credit: Tom Wolf | Photography

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The following is a guest post sponsored by City Index.co.uk.

Spread betting offers an inexpensive gateway into the world of stocks, indices, commodities and currencies, making it an attractive alternative to traditional trading for new traders.

In addition, it also offers traders tight fixed FX spreads from 1 point to greater leverage.

Meanwhile, this form of trading requires a deposit which is only small percentage of the total value that you wish to trade – it also allows you to go long or short and to trade across a wide range of currency pairs.

However, leveraged products can result in losses greater than your initial deposit, which is why it is important to educate yourself and understand the risks.

Here, City Index shares their top tips for spread betting Forex, ideal for new traders who are hoping to achieve more profitable trades.

Research & Analysis

Some traders approach trades relying solely on technical analysis, whilst others prefer a fundamental approach.

Others use a combination of the two to trade.

In time, you will learn the best approach for you – as such, you will gain a more comprehensive overview of each currency pair and prepare for potential movements in the market based on trends and/or news.

Develop a Spread Betting Plan

When trading, it’s easy for emotion to take over – trading on impulses can not only be dangerous, but difficult too.

With this in mind, it is fundamental to your trading success that you create a solid spread betting plan and strategy to not only help you manage your trades better, but help prevent indecision in the heat of the moment.

Efficient Risk Management

The trading platform from City Index provides a variety of tools to assist traders in minimizing their losses, locking in profits and entering the markets at predetermined levels in order to help them seize opportunities.

Stop and limit orders are the best way of managing your trades and risk while spread betting; they can protect potential profits by helping you get out of the market at specified prices when they reach your risk or profit targets.

Follow the News

Forex trades predominantly move in tandem with the live market – making them likely to be influenced by global, social and economic events.

A trader that keeps up to date with market events will be in a much better position to open new trades or exit positions.

Summary

Forex spread betting can be an affordable option for new traders. Researching, planning, managing risk and discipline are imperative before you start trading.

You can learn more about spread betting on foreign exchange rates with City Index at the link in the article above.

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There are, undeniably, some benefits to being married.  Both financially, and otherwise.  But, are there benefits to being single as well?  Would you be better off single? One of the biggest financial benefits to being married is the ability to have two full-time incomes coming into the household.  Using both incomes, we have the ability [...]

Beating Broke was included in the following carnivals last week: Carnival of Financial Planning – Edition #224 hosted by AaronHung.com Carnival of Personal Finance #349 - editor’s pick in Economics – hosted by Sustainable Personal Finance Carnival of Financial Camaraderie – Rain Man Edition hosted by Thirty Six Months Canadian Finance Carnival #76 hosted by The Canadian Finance Blog [...]

Welcome to the February 24, 2012 Edition #225 of the Carnival of Financial Planning. The Carnival of Financial Planning takes a long-term view of personal financial planning for individuals and families. We focus on efficient and sustainable personal financial planning practices that can lead to lifetime financial security. This edition is arranged by subject heading, [...]

First, this is a personal finance blog.  As such, I try very hard to not comment too much on politics and keep them out of my articles.  But, should I?  Do politics have a place in personal finance?  Do our financial beliefs have any bearing on who and how we vote?  Should they? I think [...]

The Millionaire Fastlane By: MJ Demarco If there was ever a case for a little less “hype-y” title for a book, this is it.  I’m not sure what else I would have named it, but the title just seems like a whole bunch of get-rich-quick hype, and it kept me from reading the book sooner [...]

Some of you will remember that last year, Eric from Narrow Bridge Finance put together a Yakezie March Madness bracket comprised of the members of the Yakezie.  He’s done the same this year, and the Yakezie has grown so much that he even had to limit the field to 64! There’s lot of good competition [...]

My family has been increasingly consuming organic produce because we are trying to eliminate all food additives, preservatives and pesticides from our diet.  If you are trying to feed your family the recommended five servings of fruit and vegetables a day, you may be spending more than you would like on produce, regardless if you [...]