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Can I Afford It?

Last week I mentioned opportunity cost. The concept is extremely simple.

If you buy a new car with $30,000 in cash that you’ve saved in the bank you obviously give up the opportunity to spend that same $30,000 on something else…like a European holiday.

Opportunity cost is often used to justify a claim that “I can’t afford it” which in everyday talk has almost as many real meanings as the number of people who use the expression. To “afford” something should mean that you have the ability to meet your payment obligations as and when they fall due which might include the not unfamiliar scene of borrowing without due consideration of the real costs of repayment.

You don’t need a degree in economics to do the maths to establish whether you can afford any particular expense.