Whether you're talking about a vacation, a new car, or a new pair of jeans, "you can afford it" means -- to me -- that the purchase fits into your financial circumstances. That means both long-term and short-term.
Just saying "I have the cash to cover it" isn't enough. For example, I could pay cash for a new BMW right now . . . but I know that I've got to put braces on one child soon, and the other is heading to college in two years, so I'd be much better off to hold onto my cash (and adding to it!) and keep driving my 2-year old Honda -- especially because I happen to love my car! That's just an example.
Different purchases require different criteria, but these are some typical questions I'd ask myself before deciding whether I can "afford it" or not:
1. Do I need this item? How badly do I need it? If I don't buy it, what will happen?
2. Is this particular item a good value, or could I get a similar product (perhaps used?) for less money elsewhere? Would I be just as satisfied with an older model or a simpler model? Could I borrow or rent this item rather than buying it myself?
3. What other expenses do I have coming up soon? Yearly insurance? Christmas presents? New tires? If I spend on this item, will I be short for any of those things?
4. What does my cash flow look like for the next few months? Do I have the money to pay for this item? Considering my overall financial goals, should that money to earmarked for anything else, or is it really money that's okay to spend?