A. I don’t have the cash for it or
B. I can’t afford the monthly payments
Most PF bloggers probably mean A because they wouldn’t even consider financing something they didn’t have the cash for, and mostly I agree. But I do think there are situations where this gets a little trickier than the proposition you might be imagining, like whether or not someone can afford a new living room set or a new car.
Take student loans for example. Most middle class families can’t pay for college for multiple kids out of pocket, so their kids take on loans. Now technically, that child doesn’t have the cash for their education right now, but by going to college, they’ll be able to afford the monthly payments on their loans from their future earnings. Would you hard-core debt-haters tell that child not to go to college because they don’t have the cash for their classes right now?
But the situation I just described gets even dicier when you consider the incredible debt burden too many students take on because they’re convinced student loan debt is “good debt.” You have to draw the line of how much student loan debt you’re willing to take on somewhere, and you should probably take your projected future salary for the field you’re studying in into account. It’s very different for a student getting a law degree to take on 100K in loans than for an English writing major to take on the same amount.
But how do you establish that limit? Things can always go wrong, or at least end up differently than you expected, and suddenly that law degree isn’t paying off the 100K in loans like it was supposed to. Or maybe if that English major had gone to NYU and studied creative writing like she wanted to, she could have written the great American novel and easily knocked off the 100K she borrowed to get the education she needed.
So my question is: how do you decide if you can afford something? Obviously, no one should be paying interest on financing consumer goods (like TVs or furniture) that they could have just saved up for. But what about less straightforward situations like the student loan scenario I just described?
I’d love to hear as many thoughts as possible, because I’ve been thinking about this for a while. Also, I have a really bad cold, so I’m going to be doing a lot of nothing for the next few days, so I’d love some thought-provoking comments to keep me occupied!