Redefining Affordability

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Nick Foy, CFP®

The ongoing battle for real financial advisors (as opposed to salesmen) is to convince people that delaying some gratification is worth their time. It’s a battle we’re destined to lose, but we fight on undeterred.

Back in 2011, Brett Arrends wrote an article in the WSJ called The $2,000 iPad, in which he attempted to show that the opportunity cost for an iPad (or any other $500 spend) is actually significantly more than the sticker price, assuming you would’ve invested the money instead:

Historically, the stock market has produced average long-term returns of maybe 5% a year above inflation…
At that rate, in 10 years’ time my $500 will have grown to about $800. That’s in today’s dollars—after inflation. In 15 years it’ll be about $1,000, and in 30 years, $2,000.
I figure I’ll be retiring in about 30 years, which is when I’m going to need lots of capital. I can have the iPad now, or about $2,000 then.
Thanks, but I’ll take the $2,000.
(If I were younger the iPad would cost me even more. If you’re 30 or younger and you just bought one, congratulations: It probably cost you about $3,000.)

Apple hasn’t sold a single iPad since.


It’s not that iPads, or cars, or any other depreciating asset are inherently bad. It’s that, if you really sat down to calculate what you’re missing out on, you’d probably choose to change your purchasing habits and instead focus on spending money on those things that will do more to enhance your life.

We already know that people who are generous are happier than those that aren’t. So, each decision to purchase a depreciating asset might actually be a decision to limit your happiness.

We also know that people who prioritize spending money on experiences are happier than those that spend on things.

You can probably afford the iPad, but at what cost?

Instead, let’s redefine affordability.

Traditionally, affordability has meant that you have enough money to buy something (or enough income to service the debt on something). Instead, affordability is a term better used in context of what is actually most important. Just because you can technically afford it doesn’t mean you should spend money on it.

Here’s how my wife and I think about it: At the end of the year, we want our biggest expenditures to be made toward those things that will ultimately bring us the most satisfaction. (We exclude taxes from this equation, because that’s not something we have a whole lot of control over.)

We decided that we want our biggest expenditures to be related to 1. Giving and 2. Travel. Those are the things that ultimately bring us the most satisfaction, so we think it’s smart to spend more there than other categories.

We might be able to afford the iPad, but that will limit our ability to spend money on those things that we enjoy more.

And by focusing on what actually brings satisfaction, the desire for more things vanishes.

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