Know if you can afford something using the x5 rule of money.
If you don’t have the capacity to buy something five times – x5, it means you can not afford it. The x5 rule says, you should have the capacity to buy something five times to afford it.
First, we should understand, buying something and affording something are completely two different things. Most times people think because they can buy something, they can also afford it. This is wrong.
For instance if you have 10k dollars, you can go to the bond and buy a 10k dollar car because you have the money. But to afford it, according to the x5 rule, you should have the capacity to buy the car five times – x5.
What does this mean when it comes to affordability?
Having the capacity to buy the car 5 times means you can manage owning the car without worrying about all the costs which come with it. Buying a car comes with costs like periodic service maintenance, parts replacement, fueling, etc.
All these require money. If all you have is what can buy you the car from the bond – 10k dollars to buy 10k dollars car, you will most likely struggle to pay for these other costs. But if you have the financial capacity to pay for the car five time – x5 rule – it means you can afford it without straining yourself financially.
If the car is stolen, or something happens to it beyond usage/repair, you can still go to the bond and buy another one, because you have the capacity. Imagine all you had was the 10k dollars and something similar happened to the car. You will most likely move from owning a car to footing.
Using the x5 rule, you should be having 50k dollars capacity to afford a 10k dollar car and remain financially in line. If you only have 10k dollars, then what you can possibly afford is something of 2k dollars. Financially, your in the ordinary motorbike category.
Those of us who value things like Iphone, if your iPhone gets stolen today or is dead, do you have the capacity to walk to the shop and buy the same or new model iPhone brand new? If not, you don’t belong to the iPhone class. Let’s try Infinix, Tecno etc.
On necessities like rent, food, clothing, home bills, etc, the rule will help you know how much you should spend on these items. Though you might want to reduce the rule multiple to x2, x3..,Your livelihood depends on these items. But it will tell where you’re level of expenditure on such items lie. You don’t want to eat, cloth or sleep like high income earners on a low income budget.
But if you can increase your income to a point all your expenses including necessities follow the x5 multiple, then good for you. In the long run, increasing your income should be the main goal.
So far we demonstrated the x5 principle on liabilities, how about on assets? Do I still need to be able to afford an asset 5 times – x5 rule – before I can afford it?
When buying something which will generate income for you – Cashflow – or increase in value – capital appreciation, you don’t need to be able to afford it 5 times before you can buy it, x1 is enough. Though when considering risk taking perspective, something like x2 should be ideal.
Why x2 as risk taking mechanism?
Assuming you intend to start a bussness (asset) you don’t want to put all the money you have in the business once. Lets say you have a business idea of 5k dollars and you put all your 5k dollars in it x1, from risk taking perspective, this is risky. You don’t know what will happen to the business. Thats why x2 is more realistic here.
Conclusion.
Apply the x5 rule on your expenditures, especially on items which loose value and have no monetary return or value appreciation – also known as LIABILITIES. The rule is a good expenditure control mechanism.
It might look like, the rule will deprive us of enjoying our life and the fine things which come with it, on the contrary, it puts us in control of our finances. There’s no enjoying life when you have to stress yourself financially to live that life.
Fahad Bruhan Jr is an Entrepreneur, Investor, Thought Leader and Writer in the fields of Business, Investment and Personal finance.
He is the founder and lead contributor with Afripreneur Nation. A community which focuses on building the capacity of African entrepreneurs. He is team member at Financial Education Academy – FEA.
His vision is to see an African society which is Economically Empowered and Financially Enlightened.
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