-
When it comes to financial decision-making, one of the most important steps you can take is to conduct an affordability check. This essential financial exercise helps you determine whether a purchase or loan is within your financial means and aligns with your long-term goals. So, how can you do your own affordability check?
Understanding affordability
An affordability check involves evaluating your income, expenses, savings, and financial goals to determine if a purchase or financial commitment is appropriate for your current financial situation.
Key benefits of doing an affordability check
At its core, affordability is the concept of living within your means. In short, by conducting an affordability check, you can avoid overextending yourself financially and falling into a cycle of debt.
Conducting an affordability check provides numerous benefits, including:
- Preventing overspending: An affordability check helps you stay on track with your budget and prevents you from making impulsive or unwise purchases that could negatively impact your financial health.
- Managing debt responsibly: Ensuring that a loan or credit solution is affordable allows you to manage debt more effectively and avoid falling into a debt trap.
- Building a strong credit score: By making financial commitments that are within your means, you're more likely to make timely payments, which in turn helps build a strong credit score.
- Achieving financial goals: Affordability checks keep your financial goals in focus, enabling you to make informed decisions that will help you achieve your short and long-term objectives.
How to conduct an affordability check
Here are some steps you can take, to perform your own affordability check:
- Start by evaluating your income: Calculate your total monthly income, including your salary, any side income, and other financial sources.
- Determine your expenses: Make a list of your essential expenses, such as rent, utilities, groceries, and transportation. Don't forget to include existing debt payments, insurance premiums, and contributions to savings or investments.
- Calculate your disposable income: Subtract your total expenses from your income to determine your disposable income. This is the amount of money you have available for discretionary spending or additional financial commitments.
- Assess the financial commitment: Consider the cost of the purchase, and determine if it fits within your disposable income. Ensure that it aligns with your financial goals and won't negatively impact your financial stability. Plus, make sure you don’t just focus on the short term: consider how a certain purchase or financial option is going to impact your financial life in the long run. For example, if it’s a loan, think about the affordability of monthly repayments but also how much you’ll be paying in interest costs overall.
The bottom line
Conducting your own affordability check is a simple yet powerful way to maintain control over your finances and work towards a secure financial future. By consistently evaluating the affordability of your financial decisions, you'll develop the discipline and financial acumen necessary to make better informed decisions along the way and achieve your goals.
Disclaimer: Please note that the content provided in this article is intended as an overview and as general information only. While care is taken to ensure accuracy and reliability, the information provided is subject to continuous change and may not reflect current developments or address your situation. Before making any decisions based on the information provided in this article, please use your discretion, and seek independent guidance.