Can I afford that new phone/bike/car? Here is a simple way to find out!

Last Updated on

Are you worried if you can afford that new phone or bike or car? Feeling guilty and tempted at the same time? Here is a simple way to find out affordability & organises finances so that you can responsibly buy stuff you love! Every time I got to a corporate money management session, I always hear stories of how young earners buy stuff that they can barely afford and are neck deep in debt. With a little planning, it is more than possible to enjoy a good chunk of our income for our wants.

Of course, not everyone can get everything in life! The biggest problem I see today is, many people (not just young ones) trying to live a life that they cannot afford: Have We Forgot That Aspirations Must Match Our Income?! So since is limited, so should what we desire too! If we want more, then the only way out is a second income: Why a second income is important! Why you have to start now!.

With that caveat let us begin. For the following, I am assuming that the reader is just about to start earning or just started in the recent past. It is so much easier to start on a clean slate. For older readers, the same logic discussed below would apply but they will have to factor in their other responsibilities.

Can I afford that new phone/bike/car? Here is a simple way to find out!

Defining the take-home pay

Just to ensure we are all on the same page, let us define take-home pay as

Take-home pay = Monthly Salary (gross) – taxes – provident fund contribution – miscellaneous deductions

Please do this first the first six months after you start earning

If you have not, do it now!! Take 30% of your take-home pay and put it in another bank account or a liquid fund. This will be your emergency fund. In case your bike breaks down, or TV breaks down. Enjoy the rest if you are living with parents! If you are living alone and/or if you have an education loan, obviously you will have to enjoy less! Just don’t touch that 30% though.

First 6 months of earning: Take home pie chart

Six months later

  1. Reduce the 30% emergency fund contribution to 10% (in case you use the fund, it needs to replenished)
  2. Suppose X is the total pension fund contribution (employer + employee EPF contribution). Then invest 2X in equity (via mutual funds or stocks). See: what should be my first mutual fund? and Select your first stock without breaking your head! Here is how. I have shown this to be 20% for say a one lakh take-home pay (please change as per your real number)
  3. If you have any short-term need, say a holiday in Bali or an expensive watch or smartphone or camera, save say about 30% for it. Put it in a liquid fund or a recurring deposit
  4. Rest 40% is for your spend/enjoy.

Take home pie chart after six months

Remember: Invest that 20% first, spend/save later

Can I afford that new phone/bike/car? How do I know?

Let us not complicate this.

  1. Can you buy the item by saving from salary for a few months without disturbing the 20% investment? Then buy without EMI (loan). Else go to the next step.
  2. Can you buy the item with a loan without disturbing the 20% investment? Then buy with a loan. Else, wait until you can manage the EMI + 20% investment and other expenses.

That is it! Money is to be spent! Remember that 20% investment is for you to spend it later! So it all about a healthy balance without feeling deprived.

Do not spend money like there is no tomorrow! Then there will be none!

Video Version

Can I afford that phone or bike or car? Here is a simple way to find out!

The latest from freefincal on YouTube

The nutrition label (& video) that changed my life!

My handpicked mutual funds for April-June 2019 (PlumbLine)

 

What is Portfolio Drawdown? How is it calculated and used to measure risk?

 

Do share if you found this useful

Create a "from start to finish" financial plan with this unique open-source robo advisory software template


 Don't like ads but want to support the site? Subscribe to the ad-free newsletter! 
You will get the full post-ad-free delivered to your inbox for Rs. 3000 a year. Follow this link to read the terms and sign up! 


About the Author M Pattabiraman author of freefincal.comM. Pattabiraman is the co-author of two books: You can be rich too with goal based investing and Gamechanger. “Pattu” as he is popularly known, publishes unbiased, promotion-free research, analysis and holistic money management advice. Freefincal serves more than one million readers a year with numbers based analysis on topical issues and has more than a 100 free calculators on different aspects of insurance and investment analysis, including a robo advisory template for use by beginners. Contact information: freefincal {at} Gmail {dot} com He conducts free money management sessions for corporates (see details below). Previous engagements include World Bank, RBI, BHEL, Asian Paints.

Content Policy

Freefincal has original unbiased, conflict-of-interest-free,  topical reports, reviews, commentary and analysis on all aspects of personal finance like mutual funds, stocks, insurance etc. All guest authors and contributors to the site also do not have any conflict of interest. If you find the content useful, please consider supporting us by (1) sharing our articles and (2) disabling ad-blockers for our site if you are using one. No promotional content We do not accept sponsored posts and link exchange requests from content writers and agencies. This is our privacy policy Our website is non-profit in nature. The revenue from the advertisement will only be used for hosting charges, domain registration charges, specific plugins necessary for traffic growth and analytics services for search engine optimisation.
Want to conduct a sales-free "basics of money management" session in your office?
I conduct free seminars to employees or societies. Only the very basics and getting-started steps are discussed (no scary math):For example: How to define financial goals, how to save tax with a clear goal in mind; How to use a credit card for maximum benefit; When to buy a house; How to start investing; where to invest; how to invest for and after retirement etc. depending on the audience. If you are interested, you can contact me: freefincal [at] Gmail [dot] com. I can do the talk via conferencing software, so there is no cost for your company. If you want me to travel, you need to cover my airfare (I live in Chennai)

Connect with us on social media


Do check out my books


You Can Be Rich Too with Goal-Based Investing

You can be rich too with goal based investingMy first book is meant to help you ask the right questions, seek the right answers and since it comes with nine online calculators, you can also create custom solutions for your lifestyle! Get it now.  It is also available in Kindle format.
Gamechanger: Forget Startups, Join Corporate & Still Live the Rich Life You WantGamechanger: Forget Start-ups, Join Corporate and Still Live the Rich Life you wantMy second book is meant for young earners to get their basics right from day one! It will also help you travel to exotic places at low cost! Get it or gift it to a young earner

The ultimate guide to travel by Pranav Surya

Travel-Training-Kit-Cover This is a deep dive analysis into vacation planning, finding cheap flights, budget accommodation, what to do when travelling, how travelling slowly is better financially and psychologically with links to the web pages and hand-holding at every step.  Get the pdf for ₹199 (instant download)

Free Apps for your Android Phone

All calculators from our book, “You can be Rich Too” are now available on Google Play!
Install Financial Freedom App! (Google Play Store)
Install Freefincal Retirement Planner App! (Google Play Store)
Find out if you have enough to say "FU" to your employer (Google Play Store)

Blog Comment Policy

Your thoughts are vital to the health of this blog and are the driving force behind the analysis and calculators that you see here. We welcome criticism and differing opinions. I will do my very best to respond to all comments asap. Please do not include hyperlinks or email ids in the comment body. Such comments will be moderated and I reserve the right to delete the entire comment or remove the links before approving them.

2 Comments

  1. Excellent. But how many ‘young earners’ read this and more importantly how many of them follow the advice?

  2. Beautifully explained.They could add just a plain term life insurance cover & health cover and be well set on their financial journey.

Leave a Reply

Your email address will not be published. Required fields are marked *