Going into debt to purchase expensive things is why most people are broke. Buying a bigger house you can’t afford or buying that $75,000 truck when you make $75,000 a year is why so many Americans can’t pay for a $1,000 emergency. Having the discipline to buy what you can afford is the difference between acquiring wealth and continuing to be broke.
When purchasing something with a large price tag that you don’t have the cash for, I like to work backwards to find out what I can afford. For example, when purchasing a house, you give all of your financial information to the loan officer and they in return give you the most that they will let you borrow which may be $500,000. That doesn’t mean that’s how much you should borrow. You need to consider your expenses, your other debts, and extra monthly payments so you aren’t still paying on a mortgage 30 years from now. I know my monthly income and expenses because of my budget. So, let’s say I have $2,000 a month that I can put to a mortgage while having excess in my budget to pay monthly expenses, invest in retirement accounts, and do short term savings. I don’t want to spend all $2,000 on a 30-year mortgage because I will not be able to pay extra to save money on interest. I may say the max monthly mortgage payment for a 30-year fixed should be $1,500. That then tells me that for a $250,000 home, I will need to have a $60,000 down payment to be under $1500 a month. Then I can add the $500 extra every month to see that my 30-year term just went to 15 years and it saved me $125,000 in interest. Then imagine investing $2,000 a month for 15 years because you have a paid for home. Making a conservative 8% on $2,000 invested monthly for 15 years will give you almost $700,000 while you only contributed $360,000. The sooner you are completely debt free, the sooner you can acquire wealth!