By Rick McKinstry – Dallas South News Contributor

Can I Afford It?

That is the name of a segment on a TV show hosted by nationally renowned financial advisor Suze Orman. During the segment viewers are allowed to call Suze and ask whether she thinks they can afford to buy something or not.  In most cases the item is not anything the caller actually needs, but instead, is something the caller really wants. Orman then asks the caller a few questions about their financial situation and then makes an assessment as to whether or not the caller can afford to make the purchase.

I’m not sure how many readers watch The Suze Orman Show or how many would be inclined to make that call. But one of the many insights that I have gained while working with clients is that many mistakenly equate affordability with the ability to simply make payments.

No time in recent memory has the flaw in that line of thinking been more apparent. The flaw stems from the fact that the ability to make a payment in most cases is linked very closely to the ability to earn income. With the unemployment rate at or near 10% many of those who made credit purchases based solely on their ability to make the payment have found themselves struggling to retain the purchases because they are now unemployed or have experienced a significant reduction in income.

My simple measure of affordability is this: an individual can reasonably afford those things that he or she has enough available cash to cover for a minimum of 6 months in the absence of any income. If 6 months sounds familiar, it should. Six months is the recommended number of months of emergency funds one should strive to have in case of some unforeseen disruption of income. Ironically, 6 months is also the average length of time of unemployment during the current recessionary period.

Another insight that I have gained from clients is that whenever the conversation is had about accumulating 6 months of emergency funds the first question that comes to their mind is: How am I going to make more money? After spending some time toying around with ideas on how they might make more money I challenge them with a question of my own: Where can you reduce your expense?

You see, in terms of building your emergency fund (all things remaining equal) a $100 per month reduction in expense is exactly the same as a $100 increase in income, and in most cases, a lot easier to come by. The reason that most clients think about earnings is because reducing expenses usually requires sacrifice.

Maybe we have to shop less.

Maybe we eat out less.

Maybe we drink or smoke less.

For whatever reason, the word less conjures up ideas of boredom, lack of fun, and lack of excitement. I challenge them to also consider the fact that 6 months of emergency funds also means less financial stress in their lives, less time spent wondering how they’re going keep a roof over their head, and less time spent asking, “Can I afford it?”

There are several indicators that you may already have possessions that you can’t afford. If you are currently stressing about your financial situation, that’s an indicator. If you are constantly paying late fees, that’s an indicator. If you are living paycheck to paycheck, that’s an indicator. If you have a credit score below 650, that’s an indicator. These are all indications that it is time make a thorough assessment of your possessions and where possible either reduce, or eliminate your financial exposure to these possessions.

Using a 6 month ability to pay litmus test to determine whether or not you can afford something is by no means the be all end all affordability test, but I do believe it’s better than most and surely, it’s better than no test at all.

Rick McKinstry is Personal Financial Planner (PFP) and owner of RLM Financial. He has an MBA from Indiana University and can be reached via email at rlmckin79@hotmail.com or at (972) 821-8948.