Financial Tools / Affordability
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What does affordable mean to the average consumer? How do we define affordable with debt easily available nowadays? Low interest rates are seducing consumers deeper in a financial hole! Really, does affordable matter when consumers seem to be coping with increasing debt loads? Then again, do we consider affordable housing separately from affordable medical care, or affordable transportation?
I believe we should view affordable in two ways. For a house, we should consider affordable as the ability to make a downpayment of at least 20% with zero consumer debt, and a mortgage that fits in a otherwise debt free budget; It is ability to buy the house so that the total estimated ongoing costs, including a mortgage, do not compromise current and projected household budgets, plans and commitments. For all other items, affordable is the ability to pay for an item without debt, and not compromise current and projected household budgets, plans and commitments.
Today, people don't consider affordability before spending; instead, they look at payment terms. I suggest the overarching goal for each household should be to live a debt-free lifestyle. Therefore, households should consider affordability before committing to spend. That's why I developed the Affordability Index.
I believe a person should not borrow to buy any item other than her home. Accordingly, excluding your home, you can't afford to buy an item if you must borrow to get it. To buy a vehicle, a fridge, stove, or other consumer item, pay cash, including using a credit card and paying the full balance.
Governments try to define affordability for us. They want households to use the same reckless Ponzi-style funding they use to waste taxpayers’ monies. Reject their approach. Each household memeber should decide if he or she can afford to buy a home. Here is a simple checklist I suggest you review. Ensure each of these criteria exist before you conclude you can afford to buy a home.
To get a grip of this challenge, separate two decisions. First, can the home owner afford her present home? Second, if no, how can we work with her to provide affordable housing? While mulling over these two questions, review these seven housing myths.
If the person or family can’t afford the home using my definition, move directly to question two. Don’t try to give so called help by lowering or deferring a few months' mortgage; that’s dishonoring and wasteful. Dishonoring because it gives the impression the family will be able to keep its home. Then, in a few months the family must give up the home. The approach is wasteful because time and money is spent knowing the family must leave the house.
In these situations, focus on lifestyle counseling including financial planning. Stress lifestyle issues such as affordability, budgeting, anatomy of a mortgage, and stewardship. Teach the virtues of renting when folks can’t afford to buy homes; it is a virtue. Some ownership arrangements give home owners significant risks with no equity. That’s why so many mortgages are higher than home values.
Folks in unaffordable homes need counseling as they work with churches and charities to prepare them to live in rented homes. This could be a long journey. But, if folks reject the victim path and learned from their errors, it could be rewarding.
The affordability calculator will help you answer this question: Can you afford your lifestyle? If you want to be a good steward of God's money and practice effective biblical stewardship, you need to ensure you can afford to spend before you spend. The affordability index is a Christian financial management tool designed to help you stay away from debt. If you use it routinely, you will live debt free.
We developed the Affordability Index to help folks decide, based on preset conditions, if they can afford major outlays. We defined affordability earlier as the ability to buy consumer items without going into debt, and without compromising prior needed commitments. This procedure does not replace dependence on God. Instead, it's meant to help you clarify wants from needs so you might focus your prayers. Let Jesus be your final decision maker. The Affordability Index quantifies contemplated spending decisions based on our PLANE Spending Analysis that asks these five questions:
The Affordability Index has two preconditions. First, define precisely the spending objective. Why am I spending? For example, you might wish to change your car. However, that's not a good spending objective. The real issue is this: What are my current and medium term transport needs? This is a different question that could produce a different answer. Think about this carefully because poor spending objectives' definitions normally lead to excessive spending based chiefly on clever, seductive advertising.
The second precondition is to ensure the proposed spending conforms to the GAS Principle. If it does, answer the PLANE questions above based on a proper definition of your spending objective. After, fill in the Affordability Index Calculator below for the item you believe fits the objective. Decide to apply the Affordability Index to all spending on individual items greater than a predetermined amount. Husbands and wives should use it together. When you use the Affordability Index, always review Matthew 6:24-31. Recall Jesus' promise to supply our needs.
For more information on both the Affordability Index and the PLANE Spending Analysis refer to The New Managing God's Money-The Basics pages 225 to 237. There you will see suggestions to evaluate two exceptions; a car for work, and a special one-off item called a "vase". We would appreciate your comments.
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Each person and family's situation is different and needs separate review.
Before you implement financial decisions, consult an Independent Financial Advisor.