Affordable is Relative

Driving to save a few cents on gas is a fool's errand.

written by oz chen

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One of my dreams is to fly first class on an international trip.

But I find the cost exorbitant.

An economy flight from LAX to Taiwan is just shy of $1000.
To fly first class? $20,440.

All sorts of feelings and emotions arise with this simple hypothetical:

This flight is the cost of a used car!
Who am I to buy this? I’m not a multimillionaire!

If I buy this, that’s thousands of dollars I should be investing…

Let’s change the situation: what if I was training for the biggest event of my life, and want to make sure I arrive at my destination well rested? Then maybe the first class flight is worth it.

Let’s explore how thinking in relative terms can helps us navigate questions about affordability.

How the brain reacts to prices

In 2023, due to high inflation everywhere the price of eggs caught on like a meme.

Like anyone other consumer, I’m not happy about prices increasingly. Eggs or otherwise.

But when I think about it – some essentials are so cheap, that even if prices double it’s not going to make a material difference. A dozen eggs for $2.99 go up to $5.99. In our brains we think “omg eggs just doubled in price the world is ending” but in reality, what’s another $3?

This happens because of the anchoring bias.

Studies show that prices we see first are used as anchors for following prices. This works for everything from luxury products to everyday items like eggs.

Anchoring bias shows that the way we think about price, cost and affordability…it’s all relative.

Affordable is Relative

Blogger Financial Samurai proposed the 1/10th rule for car buying, which is that a car should cost no more than 1/10 of your annual salary.

By this rule, someone who makes $100,000/year should only spend $10,000 max on a vehicle.

If you’re like me, you might balk at this “rule.” Average used car prices are $26000 and only 6% of American households make over $200K.

But the point is to think of price in relative terms.

You can measure things relative to your total net worth, monthly income, average spending, current savings…whatever feels relevant to you.

This is particularly useful when you lack a frame of reference. For me, this is usually when I’m buying something for the first time or dealing with higher costs than I’m used to.

I was once invited to a weekend trip and felt really unsure about the AirBnB cost of $500/person. I wasn’t used to paying this much for an AirBnB.

Then, a realization: I never gave myself a vacation budget.

Relative to my income at the time, I came up with an annual vacation budget of $5000.
$500 was only 10% of my new budget.
Like magic, I immediately felt better saying “yes” to the trip.

To help you answer “Can I afford this?” I offer you three mind hacks, all based on the idea of relativity.

Affordable, relative to your goals

Is something affordable if you can access it – let’s say charging your credit card – or is it only affordable if you can pay it in full?

That depends on your financial goals.

If you’re trying to make a massive change in your life like going to college or make a career shift, it makes sense to trade debt for opportunity. That can be “affordable” relative to the goal of making more money.

But we also confuse needs with wants all the time.

If something is an optional expense and you can’t pay in full for it, then you can say that is less affordable.

Affordability is not just financial, it’s emotional too. Take the example of opportunity costs.

HBO Max is only $9.99/month. But if my goal was to focus more on my writing, can I afford to give away even more of my attention? (I’ll just bum Last of Us off of my girlfriend’s parents).

This is why payment plans and the trendy buy-now-pay-later options can be a slippery slope.

That’s because they hide another measure: total cost.

Affordable relative to total cost

One tip that’ll save you time and stress: it’s rarely worth going out of your way to get cheaper gas.

One time, I found myself deciding whether I should drive 3 miles to save 30 cents per gallon on gas. My brain could not help but “see” the difference between $4.49 and $4.19.

My hybrid’s only got 10 gallons. Driving out of my way to fill up cheaper would cost (drumroll…) a whopping $3. I could afford that.

On the other hand, people spend more than they should because they don’t consider total cost.

When you buy a car, it’s not just the sticker price you pay. You’ll also pay for tax, DMV fees, and costs of operating the car like insurance, gas, and parking. This term is called “total cost of ownership” and you can search it for different car brands – there’s a reason why this information is not commonly highlighted ;)

So it’s not “can I afford this car now?”

Total cost gets you to think “can I afford this car on an ongoing basis?”

Can you afford not to do this?

Back to that example of the $20,000 flight.

If I think this might be the last international trip I take, then I’d almost certainly pay the expense, no matter how extravagant it seems.

We don’t need such extreme examples to consider that there are better and worse times to spend money in life.

It’s better to spend money on experiences when you have your youth and health.

How likely do you want to take a red eye and hike Macchu Picchu 2 decades from now?

My best travel experiences were when I traveled when I was poor. I had less money, had to be more creative, and I felt more connected to other travelers staying at hostels and doing free walking tours, vs being holed up in a nice hotel room.

Think of affordability in terms of “return on experience.”
You might only take a trip once, but end up talking about it for the rest of your life.
Those are memory dividends you get from that experience.

So if there’s a chance, an opportunity to do something you’ve wanted…consider that something is more “affordable” now, because it might be less affordable later.

This isn’t to say YOLO and blow through your savings. It’s using your time and life force as a way to measure if you should invest in an experience.

Make relativity your new financial tool

The personal finance world espouses many strong opinions about what is “affordable.”

Some people tell you to skip the expensive Starbucks coffee and invest it instead.
Dave Ramsey tells you to never spend on a credit card, because debt is the devil.
Blogger Financial Samurai suggests you should only buy a car if it’s less than 1/10th of your annual salary.

These are all built around the notion of what is affordable.

Money is like water, fluid and ever changing. So we need to organize it somehow.

Affordability is just about putting bounds on money to help us make financial sense of the world.

This is even more helpful if you’ve inherited financial beliefs that stress you out about money.

Your parents, peers or other financial influences in your life probably had different relative measures, unspoken in their head. All measures that they might project onto you.

The immigrant mom might measure things relative to her home country (like my mom did), and the tech worker might measure things relative to their annual bonus.

This is where personal finance gets fun, because you get to make up the rules.

I hope that the tool of using relative measures helps you feel like you’re the CEO of your life.

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