monodactyl3months ago
Can I afford this one-off purchase?
Something on this post got me thinking about what framework would be to determine whether we could afford something. The post is meant to be light-hearted, but OP mentioned that at a net worth of $1 million, he would consider getting a Tesla. I got to wondering and created this 2-way table.

In short, it tells you what the effect of a one-off purchase would be on your net worth in 20 years. It's a little interesting for me to see how inelastic your long-term net worth is if the purchase is either a very small portion of your annual income, or if it's a very small portion of your invested assets. If something is 2% of your net invested assets, it doesn't really matter that it's 100x your annual salary. That's probably not that surprising, but for intersections in the middle, like an expense that's 50% of your current net worth and 50% of your current salary, the effect on future net worth is probably not as intuitive.

Personally, I'm thinking that if a one-off purchase decreases your long-term net worth by less than 3% and is something you do very infrequently, then you can afford it. Any thoughts on that? I suppose if your investable assets are scheduled to be well above what you need for a livable 4% in 20 years, you can make a purchase that haircuts you a bit more.
#Personal Finance
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