Sunday, 26 February 2012


I can't afford to... - so what the hell does it mean? As an economist I should understand and clearly define the meaning of such predication, yet I could struggle and all attempts to do it could go in vain. Affordability is probably one of the most ambiguous concepts in economics, containing enough imprecision to leave its users much room for (mis)interpretations.

Personally, I would distniguish three main concepts of it. If you can afford to buy something, you:
1) have enough money not only to purchase the item you want to have but also don't need to cut back on other expenditures - a very conservative approach, I'm kind of attracted by,
2) have enough money to spend it on a specific item - conservative approach, the one I'm guided by while managing my personal finances,
3) expect to have enough money to service the debt you run up to buy what you want and in the meantime don't have to tighten the belt while repaying the loan - a contemporary approach, not really what I embrace, yet not what I reject,
4) expect to have money to pay back the loan you take out to finance you dreams, but struggle to make ends meet - a subprime approach, what I consider a regular folly and signifcant threat to financial stability on micro- and macroeconomic levels.

While approaches no. 2 and 3 prevail, the difference between the two can be illustrated by the language of accounting. If you have cash at hand to buy something, I would call it a balance-sheet approach, whereas calculating what share of your monthly income can be spent on debt service can be called a cash-flow approach. Banks, when they analyse their customers' creditworthiness, check, whether the current cash flows are high enough to cover the debt service expenses. This method is a huge simplification, as it assumes that:
1) a borrower doesn't lose their source of income (downcase scenario) or
2) a borrower doesn't receive an additional income (upcase scenario).

Most people around lean towards the cash-flow approach. It's not uncommon that a human being is impatient and would like to have its needs met immediately*, without waiting and putting money aside and often without initial sacrifices. Such approach squares also with life-time income theory, yet as every model is based on several assumptions, including no misfortune is going to crop up. The model works properly as long as your career develops in a natural course (i.e. at startpoint you earn little and then your earnings rise until you retire), no illness, accident or death hits you. Well, there is no perfect model in economics, each model has its limitations, and inputs will always determine outputs.

My personal preference of the balance-sheet approach stems from the insecurity. I hope what future holds for me is only bright and do my best to ensure it, but since I've seen fellow good workers laid off out of the blue in an inhuman way, I don't want to take a risk of having a debt burden and being jobless at the same time.

* Example I heard at work in April 2011, one of my colleagues saying about her friends: They have a flat, but would like to swap it for a bigger one, but unfortunately their outstanding mortgage debt in CHF is higher than the market value of their current flat - my jaw dropped open, how about yours???

Another example - recently I changed my commuting routes and leave the car at a P&R car park closer to home, this lets me save some 3 PLN each day. But I did it not because I can't afford to buy petrol - I could even easily drive directly to the office every day and spend on it some 200 PLN more a month. I clamped down on driving because I consider it a waste of money which could be put it aside and utilised in a better way in the future.

Next week: The Iron Lady - film review (watched it, but had too little time to put all my thought into the correct order)

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