#11 What is affordability, really?

Just the other day, I really wanted to treat myself to a Starbucks coffee which costs around INR 300+ on Zomato/Swiggy, but I also knew that my bank balance would take a hit. So, I checked my transactions history and found a transaction of 400+ INR, which was a credit (addition) as part of bank savings interest. I called my dad up, and explained to him how I should be able to treat myself because the interest income is passive. He then checked his own account and proceeded to treat himself to one as well.😆 (Tells you of my great financial skills)

Was it really reasonable? Maybe not. Will I do it again? Yes.

But putting my coffee addictions aside, how do you know when you can afford to buy something bigger, say a car or a house? How can you assess your affordability?

The official definition of affordable is defined as something that is inexpensive and reasonably priced. This is useless and vague. Someone having 50 lakhs in their account would probably consider a coffee worth 400 cheap. In which case, how do you calculate if you can actually afford something?

Does having 1 crore INR in your bank account mean that you can buy an apartment worth 50 Lakh? Well, not really. Does having 2 crores mean yes? Well let’s see. Here are some financial rules you should be aware of:

1. Rent - to - income ratio: The general rule is that you should not be spending more than 30% of your in - hand income on rent. So, if you make 60,000 after tax, then you monthly rent should not be more than 18,000. This is of course, the upper limit. If your rent is less than this, that is good enough.

2. Emergency Fund: In this day and age, you should try to protect yourself financially against a layoff. You can do this by building an emergency fund which should have at least 3-6 months’ worth of expenses in it. So, if your monthly expenditure is, say 40k, you should have aim to have at least 1,20,000 - 2,40,000 in your emergency fund, so that you can maintain somewhat of a similar lifestyle is before.

3. 20/10/4 Rule: This rule refers to buying a car and taking a loan to do so. So, if the car costs around 10 lakhs, you should put 20%, or 2 lakh as down payment, the EMI (Equated Monthly Instalments) should not be more than 10% of your monthly income, and the loan duration should not exceed 4 years.

4. Total EMI: Statistics say that every 7 in 10 iPhones in India are purchased on EMI. Apple has made this possible buy offering the middle-class lucrative EMI options. But even then, your phone EMI should not be more than 10% of your monthly income. And the total EMI you pay for all your loans should not cross 40% of your monthly income.

But one thing I’d like to emphasize here is, is to always always focus on increasing your income instead of turning down your expenses. And secondly, it is very important to figure out your own personal relationship with money, especially when you’re just starting to earn, instead of always relying on rules and hearing others’ advices. The rules have, and will always, act as guiding measures, and not absolute answers. I want you to redefine affordable for your own self.

After all, rules are meant to be broken anyways. 🤠 

Disclaimer: This is not investment advice by any means. This is just to help people understand key personal finance rules.

What are some financial goals you’re working towards/would like to work towards?

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