One of the most interesting things I’ve learned from having the opportunity to discuss money with people from all walks of life is how much of an effect our deep-seated money beliefs have on our financial outcomes. One of these beliefs is how we perceive whether or not we need to buy something – some people buy what they can “afford,” while others go with what they actually need. I know, because I used to embody this belief.

Little Decisions That are Actually a Big Deal

Every day we make little decisions - like whether to take the bus or hail a cab or whether to cook dinner versus order delivery. How you make these decisions is actually a key determinant of your financial situation. It’s how people who even make hundreds of thousands per year end up riddled with debt and with very little savings (true story, I know people like this.)

What It Looks Like

This really struck home with me recently, when I met up with friends who had taken the subway and walked about a half mile to the place we were meeting – a minor inconvenience versus just getting dropped off out front. These are people who could easily afford the $10 it would cost to hire a ride, but their mindset is, “Why spend the money if we don’t have to?”

On the flipside, I’ve heard people joke they’re “too poor” to own a car, but not “so poor” they have to ride the bus. The irony is, I own a car and yet I take the bus all the time – finding the economical way to accomplish life is not just about whether or not you can afford it, it’s about spending according to what you need – it’s a mindset.

Why It’s a Big Deal

This may not seem like a big deal – saving $10 here and there on transportation around a city is not going to make or break your ability to retire, (although there is an argument that it might, see this calculator) but that mindset where your spending decisions are made by whether or not you can afford something, versus whether you really need to spend the money is what’s so dangerous.

Many people use the “affordability test” when deciding what kind of car or house to buy – just because you can squeeze $450/month out of your budget in order to make a car payment doesn’t mean you need that nice of a car. Likewise, the feeling of being “house poor” often originates from someone buying what they think they can afford, which is really much more than they need.

How This Mindset Had Me Living Paycheck-to-Paycheck Until My 30’s

I can get a little lecture-y on this, but that’s only because I’ve been there – until about the age of 32, I was caught in a loop of saving and spending that was keeping me on the edge financially, no matter how much or how little money I made. I lived in the nicest apartment I could afford and bought my last new car based literally on what I had left over in my bank account each month, not based on what would allow me to work toward other goals of escaping credit card debt and building up an emergency fund.

What Changed For Me

The thing that revealed this psychology to me was when I found myself needing dental work that required an up-front payment in excess of $5,000, which of course I didn’t have. Without a second thought, I charged it to a credit card, then started aggressively paying $300 per month toward the balance until it was gone. My “aha” moment was when I realized that I was able to “find” $300 per month toward a payment, but prior to that I somehow didn’t feel like I could “afford” to save that same amount.

Once I paid that balance off, I immediately added an automatic deposit to my savings in the same amount, which eventually lead to a real emergency fund. Seeing the balance of that account hit $1,000 lead to a shift – having a comma in my savings account relieved a burden of financial stress I didn’t even know I was carrying.

The Key Take-Away

It was a crucial lesson, that translated to literally every other payment I had in my life. In the past, whenever I had a payment end, such as paying off my car loan, I always found a way to replace that payment, like moving into a more expensive apartment. If I could go back in time, I’d stop 30-year old Kelley and tell her to instead stay in the cheaper apartment and stop paying for things just because she could afford them and instead talk to her about living within your means according to what you need, versus what you want or can afford.

The next time you find yourself making a financial decision with the reasoning that “it’s what you can afford,” stop and ask yourself if it’s also what you really need, or if it might make more sense to keep that money in your pocket. The way I talk myself out of spending in these situations today is to remind myself that every dollar I don’t spend today is a dollar that can help me stop working sooner.