Can I Afford It? Suze Orman’s Financial Test

Suze Orman, a well-known financial expert, has long championed a practical approach to personal finance, particularly when it comes to spending. Her philosophy guides individuals to make spending decisions that support their overall financial well-being rather than undermining it. She provides a clear, actionable framework for evaluating whether a purchase truly aligns with one’s financial reality and goals. This framework aims to empower people to spend with confidence and avoid common pitfalls that lead to financial distress.

Suze Orman’s Key Questions for Affordability

Before making a significant purchase, Suze Orman advises asking three fundamental questions: “Is it kind? Is it necessary? Is it true?”. These questions encourage deep reflection beyond mere desire.

To assess if a purchase is “kind,” consider if it leads to high-interest debt or compromises financial stability. Draining an emergency fund or incurring high credit card interest (often 18-29% annually) is not financially kind.

The question of “necessary” distinguishes between a need and a want. An item is not necessary if it forces one to exceed their budget or neglect essential living expenses. Needs include basics like food, housing, and transportation, while wants are discretionary.

Considering if a purchase is “true” involves aligning the decision with one’s financial values and long-term objectives. This ensures spending reflects beliefs about money and contributes to financial security. A purchase might be affordable, but if it contradicts saving for retirement or becoming debt-free, it is not “true” to one’s financial path.

Beyond these foundational questions, Orman emphasizes other critical factors that determine true affordability. Having an adequate emergency fund is paramount, with her often recommending enough savings to cover eight to twelve months of essential living expenses. This financial cushion provides security against unexpected events, ensuring that a new purchase does not leave one vulnerable.

Another crucial aspect is the state of one’s existing debt. Orman generally advises against making large discretionary purchases if carrying high-interest consumer debt, such as credit card balances. Eliminating this debt should take precedence, as the interest paid on it erodes financial progress.

Contributing consistently to retirement savings, ideally at least 10% of gross income, also forms part of the affordability criteria. If a purchase compromises this vital long-term saving, it may not be truly affordable. Furthermore, the ability to pay for a purchase in cash, or with a very short-term, low-interest loan, indicates a stronger financial position.

Assessing Your Personal Financial Landscape

Understanding one’s current financial situation is foundational to answering Suze Orman’s affordability questions effectively. This assessment begins with a clear picture of all income sources. This includes not only regular salaries or wages but also any freelance earnings, passive income from investments, or other consistent cash inflows. Knowing the total net income provides the baseline for all financial planning.

Next, a detailed analysis of expenses is essential. Expenses should be categorized into fixed and variable costs. Fixed expenses, like rent or mortgage payments, loan installments for vehicles or student debt, and insurance premiums, generally remain consistent each month. These predictable outflows form a significant part of the budget and must be accounted for before any discretionary spending.

Variable expenses fluctuate based on consumption and choices. This category includes groceries, utility bills, transportation costs, and discretionary spending like dining out or hobbies. Tracking these costs helps identify areas where spending can be adjusted to free up funds for savings or debt repayment.

A comprehensive review of all debt obligations is also critical. This includes outstanding balances on credit cards, personal loans, auto loans, and student loans. Understanding the interest rates associated with each debt is vital, as high-interest consumer debt can quickly accumulate and hinder financial progress.

The status and adequacy of an emergency fund represent another key component of the financial landscape. This fund should be held in an easily accessible account for liquidity. Calculating the amount needed for eight to twelve months of essential living expenses provides a specific target for this crucial safety net.

An individual’s current savings for other goals, such as retirement, a down payment on a home, or a child’s education, must also be assessed. This involves reviewing balances in retirement accounts like 401(k)s, IRAs, and any other investment accounts. Understanding these balances indicates progress towards long-term financial objectives and helps prioritize spending.

Finally, calculating overall net worth offers a holistic view of financial health. Net worth is determined by subtracting total liabilities (what is owed) from total assets (what is owned). This figure provides a snapshot of financial standing and helps track progress over time. Gathering and understanding these specific financial data points provides the necessary foundation to apply Orman’s affordability framework with precision.

Making the “Can I Afford It?” Decision

Synthesizing the gathered financial information with Suze Orman’s affordability questions forms the core of the decision-making process. This step involves a direct comparison of one’s personal financial data against the criteria implied by her framework. For example, if a desired purchase would require using a credit card and carrying a balance, it directly conflicts with the “Is it kind?” and debt-free criteria.

When some answers to the affordability questions are favorable and others are not, careful consideration of trade-offs becomes necessary. The decision involves weighing immediate gratification against the financial benefit of paying down debt. Recognizing these opportunity costs is vital for disciplined financial management.

The process demands an honest evaluation of financial discipline and the long-term implications of spending choices. A purchase might be technically possible but could derail progress toward larger financial goals, such as retirement or homeownership. Prioritizing financial security and future well-being over immediate desires is a central tenet of this decision-making. Suze Orman often states that people should live “below their means but within their needs,” emphasizing that spending all available income is not prudent.

The final steps in making a confident, informed decision involve reviewing all assessments and committing to a choice that supports financial strength. If the purchase aligns with all the affordability criteria, and does not compromise emergency savings, debt repayment, or retirement contributions, then it can be made with confidence. Conversely, if the assessment reveals potential financial strain or conflicts with long-term goals, deferring or re-evaluating the purchase is the responsible action. This structured approach helps individuals avoid impulsive spending and build a more secure financial future.