How Much Can I Really Afford?

$3.50 for a café au lait: Affordable. $8 for a tuna melt: Too much. 99 cents for an app: Unnecessary. $600 for an iPad: Essential! How exactly do we decide what’s a necessity and what’s a luxury? Real Simple investigates.

Photo by Michael Rosenfeld/Getty Images

Last January, at a department-store outlet, I purchased a pastel-flecked sweater, gray corduroy jeans, and a pair of powder blue silk trousers—all designer, and all for around $300. The pants especially felt like a coup: Originally priced at $1,200, they were on sale for $92. What a bargain, I thought, as I handed over my credit card. Although none of my purchases were necessities (powder blue silk trousers?) and I was still feeling the pinch of the previous month’s holiday gift-buying bonanza, I went into the fuzzy, soft-focus state that frequently overtakes me when I’m shopping. Suddenly, I lack the ability to reason, to think of anything—the health-insurance premium I have yet to pay that month, the article for which I’ve yet to be paid—except the purchase at hand. I might have remained in this gauzy mode had the saleswoman not intruded: “You’re quite the shopper,” she said, glancing down at her computer screen. “In the past seven years, you’ve spent enough to buy a small car.”

Setting aside the meddlesome strangeness of her comment, I was mortified. I began to contemplate, for the first time ever, how difficult it is for me to wrap my mind around what I can and can’t afford. I am someone who digs out the dregs at the bottom of a tube of lipstick before buying a new one and who refuses to order soy milk steamed from the coffee shop because it costs 15 cents more. Yet I’d frittered away this much money on clothing? I thought about all the other ways I could have used that money: I could have opened a retirement fund, made a down payment on a small house, or, yes, bought a car. I wondered, as I left the store, why I always feel that I can afford to buy new clothes, but I seem to believe that these other expenditures are out of my reach.

The question of what is and isn’t affordable would appear to be a fairly straightforward one. After all, if we have the money to pay for something—either outright at the time of purchase or when the credit-card bill comes due—then we can afford it, right?

It turns out that reality is more complicated. “People have very elastic ideas about what they can afford and what they can’t,” says psychologist Michael Cunningham, a professor at the University of Louisville, in Kentucky, who studies monetary decisions. “Sometimes people think, If I can find a way to pay for it and take it home, that means I can afford it, as opposed to considering whether it fits into a strict budget.” After all, when we’re in line, about to spring for a stash of fancy new cosmetics, say, or a high-end bottle of wine, how many of us are mentally reviewing the finer details of our budget? In those moments, our notion of what we can afford is influenced by a host of other factors. According to the experts, here are five key influences.