What Can I Really Afford?

By: David Gatchell, author of The Financial Empowerment Handbook

When making significant purchases like a car or a home, it's easy to be influenced by dealers and brokers who suggest what you can afford. But should you trust their advice? Absolutely not! Affordability is deeply personal, tied to your financial goals, spending habits, and long-term plans. What might be manageable for one person could be overwhelming for another. Understanding what you can afford requires a clear view of your personal finances—something only you can know.

To start, lets define affordability:

The ability to purchase an item or service without compromising your financial stability or future financial goals, based on a clear understanding of your income, expenses, and savings priorities.

This means that something is affordable if you can pay for it while maintaining your budget, meeting your ongoing financial obligations (such as bills and debt payments), and continuing to save for both short-term needs (like emergencies) and long-term goals (like retirement or a child’s education). It also implies that purchases should ideally be made from savings, not through accumulating debt or sacrificing essential financial commitments.

Some people budget to save a certain percentage of their income each month, donate to charity, and maintain a conservative approach to spending. Others might consider their income as ripe for spending without much thought to savings or future financial security. And then there are those who spend more than they make, relying on debt to cover their monthly needs.

With such varying financial behaviors, it's clear that what's considered ‘affordable’ for one person may be entirely out of reach for another. That’s why it’s crucial to assess affordability based on your own financial picture—not on what a salesperson or lender suggests.

How Do Mortgage Brokers Determine Affordability?

When determining how much home you can afford, mortgage brokers often rely on the 28% rule. This rule suggests that your mortgage payment (including principal, interest, taxes, and insurance) should not exceed 28% of your gross monthly income. The idea is to ensure that housing costs remain manageable relative to your total earnings, recognising that everyone has additional demands on their income (beyond housing) for fixed and variable expenses such as utilities, maintenance, transportation, food, and insurance, to name a few.

For example, if you have a gross monthly income of $6,000, under the 28% rule, your monthly mortgage payment should not exceed $1,680.

• Gross Monthly Income: $6,000
• Affordable Monthly Payment (28% rule): $1,680

By reducing the amount of income that can be used to calculate a mortgage, the mortgage industry recognizes the other expenses that a typical individual or family has to pay monthly. The 28% rule is a simple way to get there, instead of looking at everyone’s individual family budgets.?

However, this rule doesn't account for personal financial priorities or long-term goals that you may have such as saving for your child’s college education, round-the-world trip, or upcoming wedding.

For example, if you plan to save $500 each month for your child's future college fund, that’s an important financial obligation that reduces what you can afford in a mortgage. While a broker might suggest that $1,680 per month is affordable for you, your real budget might only allow for $1,180 once your college savings are factored in.

The takeaway here is that personal savings goals—whether for education, retirement, or other significant life events—must be considered in your affordability calculations. If they aren’t, you could end up overstretching yourself financially by relying solely on a broker’s recommendation.

Affordability of Other Purchases

What can we learn from how mortgage brokers evaluate affordability and apply it to smaller purchases? Young people with a modest income, such as $500 to $1,000 per month, can use similar rules to assess whether they can truly afford something.

Let’s consider Adam, a young person, living at home and earning $1,000 a month. Remember that from your income you first have to pay for all your fixed costs like food, transportation, and rents. What's left is your disposable income. For our example lets assume $500 in fixed costs per month, leaving $500 as disposable income. Lets further assume Adam is a responsible saver and puts 10% of his disposable income into his emergency fund every month. This means he has a net disposable income of $450. How much of this should he want to spend on a single purchase?

?The problem is that Adam wants a new iPhone 16 Pro Max, which costs $1,199—20% more than their total monthly income and more than double their disposable income.

• Net Disposable? Income: $450
• iPhone 16 Pro Max Cost: $1,199

Is it financially responsible to spend 2.5 times his disposable income on a single purchase? Probably not. His best option would be to save this amount for 2.5 months and then purchase the phone. He’s already a good saver so we can assume he has some funds already in his bank account.?

It’s important to reflect on larger purchases and verify that using a good portion of one’s disposable income is worth it. Instead of buying the latest model, a more responsible approach would be to purchase a refurbished iPhone 14, which costs around $500.

• Net Disposable Income: $450
• iPhone 14 Refurbished Cost: $500
• Percentage of Disposable Income: 111%

Spending all of one’s monthly disposable income on one item is a choice to make. Recognize that after buying this one item for the rest of the income period there would be no disposable income left for meals out, movies, gifts or other fun stuff.??

While more than 100% of a month’s income still seems high, it’s a better option than exceeding one’s total income with a single purchase. Additionally, by avoiding the high cost of the newest model, this young person can allocate their remaining funds to savings or future purchases. More importantly, any large purchase like this—regardless of whether it’s a phone, laptop, or another item—should be paid for from savings, not from monthly income alone.

Rather than rushing to buy a new phone on impulse, saving small amounts each month can prepare you to make the purchase in the future without derailing your budget. For instance, saving $100 per month for five months would allow this person to buy a refurbished phone responsibly, without taking on debt or sacrificing other financial goals.

The Key to Affordability: Knowing Your Budget

As I explain in The Financial Empowerment Handbook, budgeting is the cornerstone of financial well-being. Understanding what you can afford—whether it’s a house, a car, or something smaller—requires a clear view of your total income, expenses, and financial goals. Without this understanding, you’re simply guessing.

In the same way that some people live paycheck to paycheck while others prioritize savings and planning, everyone’s definition of affordability is different. So, the next time a salesperson tells you what you can afford, remember that their interests don’t align with yours. Their goal is to make a sale, often suggesting the highest price you can technically manage in order to increase their commission. But your goal should be making financially sound decisions that align with your long-term plans.

The takeaway is simple: always assess affordability based on your personal financial situation, not what someone else suggests. Knowing your financial limits allows you to make informed choices that benefit your future, rather than relying on someone else’s opinion, which is almost always in their best interest, not yours.