How can I tell if I can afford a new monthly payment in less that three months?
I watched YNAB’s Can I Afford This? video about determining whether you can afford a new monthly payment and the advice was to pretend to pay it for three months. But what if I don’t want to wait three months? My income is predictable, so it seems like there should be a way for me to answer this question in much less time.
Forest Green Moose said:
My income is predictable, so it seems like there should be a way for me to answer this question in much less time.
You don't say if your monthly category allocation is also predictable.
My income is predictable, and my monthly allocation to each category is either the same or formulaic based on number of weeks in the month, and this has been the case for me for a few years now, but that wasn't the case in the first couple of years of using YNAB. It was only after I eliminated debt, built up an emergency fund, and updated some long-deferred expenses (like upgrading electronics and paying for elective dental work) that I finally got to the point of budgeting the monthly formula to all my categories.
I wouldn't need three months in order for me to figure out if I could afford a new monthly payment; it would be a simple matter of filling all my categories in a future month (using the underfunded quick budget button), then free up the necessary dollars by reducing from my categories. I would start by reducing my discretionary spending categories. Looking at those new allocation numbers would give me a sense of IF I was able to afford that new monthly expense.
TBH, however, the notion of taking on a monthly payment is entirely hypothetical for me as it is not something I can imagine myself doing. I've come to the point where I love having NO obligations. I'd rather save up for a larger purchase than take on a payment.
The thing is, each month is different. You can know if you could afford it this month. You can be pretty sure you can afford it next month. But this, next or the month after could bring you things you didn't expect, that might make that new monthly expense difficult.
Some suggest 6 months rather than 3, so that life can throw a few more things at you while you see if you can really afford that new thing.
So there is no way to tell right now, as we don't know the future. Even in 3 months you won't know the future, but you will have a sense of where your budget feels the pressure, and a real sense of how ok that pressure is, (or that there is no pressure, of course).
however, the notion of taking on a monthly payment
What about new subscriptions? New hobby? These might result in a new monthly obligation. A monthly payment does not always mean new debt.
Lots of people have talked about there is no "normal" month and all of that is true
But if you just want a quick and dirty - but less reliable - estimation on if you can afford it... I set up an Excel spreadsheet, plug in all my current monthly goals or average spend for each category, then add in it the category I want at the end, and see if the total is more or less than my average income amount.
This tells if ON PAPER you can afford it, and also has the advantage you can play around with adjusting monthly goals and seeing what sacrifices you'd need to make.
But you have to be aware that it's less reliable than doing a test/fake/practice payment every month. No plan survives contact with the enemy.
Edit to add: I think the nature of the new payment also matters. Will it be a Direct Debit taken automatically from your account each time? Or will you manually make the payment each month and can skip a month if need be?