With credit cards and lifestyle creep, it’s easy to find yourself living beyond your means. And many, many people are currently living this way…
- 44% of Americans don’t have enough cash on hand to cover a $400 emergency.
- The average credit card debt for households that carry a balance is almost $10,000.
- Even high earners struggle to cover emergencies, with only 30% of households earning $150,000 or more have less than $1,000 saved.
This new normal is a dangerous thing for you and your financial life. Living beyond your means can create a spiral of debt, makes it difficult to eventually retire, and leads to lots of unwanted stress.
I’m not judging anyone for living like this, but this article may come off as tough love for some people. Realizing how bad your situation won’t feel good, but the hope is that this motivates you to make a change.
10 warning signs that you are living beyond your means
1. You are not saving at least 10% of your after-tax income
According to the 50/30/20 rule, you should be saving 20% of your after-tax income. That amount can include what you contribute to your 401(k), IRA, other retirement accounts, investments, savings account, emergency fund, etc.
20% is a safe bet for helping you stash enough money aside to prepare for emergencies and eventually retirement. However, many Americans save significantly less than that.
The current average savings rate in 2019 is 8.10%, which is up from around 6% in 2016.
Even though 20% is considered safe, if you are saving less than 10% of your after-tax income, then you are living beyond your means. That means if you take home $50,000/year, you should save $5,000. $100,000/year, then $10,000.
2. You have no emergency fund or savings
Saving money for retirement is one thing, but saving for unexpected expenses is what allows you to continue saving and keeping up with your day-to-day expenses when a financial emergency happens.
This is part of the reason why you need to put aside at least 10% of your after-tax income. Instead of putting an emergency on a credit card or taking out a loan, you’ll have cash on hand so you don’t continue the cycle of living beyond your means.
The rule with emergency funds is to have 3-6 months' worth of expenses set aside. For freelancers, those who own their own business, or anyone with an unstable income, at least six months of expenses is a safer amount.
3. You are living paycheck to paycheck
Living paycheck to paycheck means you are making just enough to cover your expenses. That means no extra for savings, but it often refers to people who have to borrow money to make it to the next payday.
This is so common that 78% of American workers are living paycheck to paycheck.
While there are some people who have legitimate circumstances, many people believe they don’t earn enough to save money. Others think they can’t cut back on expenses that allow them to maintain a certain lifestyle.
4. You borrow money from friends, family, or worse… take out a loan to pay your bills
Getting financial help from family is more common than you might expect – 46% of millennials are receiving financial support from their parents.
Borrowing from your family and friends can lead to awkward conversations and can break relationships when things don’t go well. But, taking out a loan of any kind increases your debt. You’re adding interest, possible fees, and it causes long-term financial trouble if you can’t pay it back.
5. You can only afford to make the minimum payments on your debt
Lots of people experience a tight month that causes them to only pay the minimum payment on their credit cards. But if you find yourself consistently paying the minimum payments only, you are probably living beyond your means.
The problem is that only paying the minimum will cost you significantly more over time. Your credit card company charges you interest when you don’t pay your bill in full, and the current APR is 15% for existing accounts. It also affects your credit score because your utilization rate will stay high.
6. You keep getting overdue notices and calls from collectors
Overdue notices, notices from your bank saying you’re account is overdrawn, calls from creditors…
Those are daily reminders that you are living beyond your means and need to seek immediate help. Many people in this situation find themselves picking which bills to pay and which they can put off for another month.
7. You borrow money to go on vacation
Everyone needs a break sometimes, but there are lots of ways to do it on the cheap that don’t require a loan or relying on credit cards to cover the costs. A vacation is supposed to reduce your stress, not add to it.
8. You cannot afford the essentials
If you are financing brand new cars, buying the latest iPhone, and new clothes every season but can’t afford things like food and toiletries, then your money is being used inappropriately. You need to adjust your standards of living and make a change.
9. You spend more than 30% of your gross pay on your mortgage
For people who live in a high cost of living areas, this can be difficult, but the general rule is to spend 30% or less than your gross pay on your mortgage.
If you’re over the 30% rule, you’re probably living house poor. This means you are saving at a lower rate and may also have a hard time meeting other financial obligations.
10. You are afraid your friends will judge you
If you’re spending money to impress others, the really impressive thing is being debt-free and having your finances under control. Think about the epic post you can share when you retire early – that’s way bigger than showing off a new car.
Letting it look like others are passing you up is usually the best way to get ahead.
And be honest with yourself – good friends won’t judge you for things like driving a used car or not going out for every happy hour. You don’t have to disclose everything, but be honest and tell them that you’re focusing on getting your finances on track. You might be surprised to learn that they’re in a similar situation.
Solutions to living beyond your means
If you read those warning signs and realized that you need to make a change, the good news is that there are things you can do to turn your finances around. Here are five solutions to help you gain control of your finances.
1. Create a budget
Learning how to create a budget is a great way to evaluate your expenses and income. Budgeting shows you how much money is coming in and how much is going out – something you might not be aware of if you’re living beyond your means.
To make a budget work, don’t guess about your income. Pull your paycheck stubs and bank records to see how much you really make each month. Be completely honest about your expenses and spending habits, too. No expense is too small to track and plan for.
Using a personal finance app like YNAB, Mint, or Everydollar can help you learn how to make a budget. These apps can help you set goals, track your progress, and send notifications when you’re about to go over in a budget category.
Anyone can learn how to create a budget, but it’s sticking to it that’s the hard part.
Here are a few of my favorite articles on budgeting for advice and support:
- Mint vs. YNAB 2019: Which Budgeting App is Best?
- 7 Easy Ways to Save Money on a Tight Budget
- Best Budgeting Apps and Personal Finance Tools
- Zero-Based Budgeting Explained: How it Works, Creating a Budget, and App Alternatives
2. Refinance student loans
Deciding to refinance student loans isn’t going to be for everyone, but the right candidates can save thousands of dollars over the course of their term by lowering their interest rates.
Should I refinance my student loans? If you’re asking that question, here’s what makes someone a good candidate for student loan refinancing:
- You have a steady income
- You know you can make the monthly payments on your student loans
- You don’t plan on using any of the federal protects like income-based repayment plans
- You have a good credit score to qualify for the lowest rates
M$M tip: You can learn how to refinance student loans at Refinancing Student Loans: The Ultimate Guide. I also recommend looking at Credible for refinancing – it’s an online platform that lets you compare rates and lenders. Read my full Credible Review for more information.
3. Get a side hustle
Not earning enough money is one of the top reasons you might be living beyond your means. Just think how much easier it would be to meet your financial obligations if you were making an extra $1,000/month or more.
That’s extra money to put in an emergency fund so you don’t have to rely on credit cards to cover those costs. You’ll also have more to pay off the debt you’ve already accrued.
There are lots of side hustle ideas out there, but the best ones are flexible and pay well for the work you’re doing. My favorite is running Facebook ads for small businesses – you charge approximately $1,000/month per client, do the majority of the work from home, and the barrier to entry is low for beginners. Check out the Facebook Side Hustle Course to learn more.
Want to look at other side hustle ideas? These side hustle articles are full of helpful and good-paying side hustles, including freelancing, rideshare driving, working as a virtual assistant, teaching English online, and more.
- 21 Best Side Hustle Ideas That are Actually Worth Your Time
- Best Side Hustle to Make an Extra $1,000-$2,000 Per Month
- How to Make Money: Top 44 Ideas for 2019
4. The snowball effect
If debt is an issue that’s causing you to live beyond your means, the snowball effect is a really popular and effective debt payoff strategy. The method is relatively simple:
- Every month you pay the minimum balance on all of your debts
- Put as much extra as possible towards your debt with the smallest balance first
- Once your smallest debt is paid off, add the money you were using to pay off the smallest one to the next smallest debt
You keep repeating this over and over until all of your debt is paid off. The debt snowball effect is that as you pay off each debt, the money you have for the next debt keeps increasing. It’s also an incredibly motivating way to pay off debt because you can destroy some smaller balances pretty quickly.
The downside of the debt snowball effect is that it can actually cost you more in interest charges, especially if you have high-interest rate debt. The debt avalanche makes more sense mathematically, but it can take a while to see your progress if you have large balances on your high-interest rate debt.
You can read about the differences and how to use the debt snowball effect and avalanche effect in Snowball vs. Avalanche: Which Debt Payoff Strategy is Best?
5. Cut up your credit cards and use cash
Credit card debt is a serious issue for many, many people. So if you want to learn how to stop using credit cards, what about cutting them up and moving to cash?
Cutting up your credit cards is a drastic measure, but sometimes you’ve got take serious and immediate action to pull yourself back from the edge.
Using cash only is a great way to stick to your budget and curb extra spending because you can only spend as much as you have on hand. A cash budget takes a little time and planning to get used to, but it’s an effective way to get your spending habits in line with your spending goals.
The envelope system is a cash-only budgeting method that uses envelopes to keep track of how much you have for different budget categories. You set an amount for each envelope, put cash in, and only use what’s there. That’s an envelope for gas, groceries, clothes, entertainment, and so on.
The final word on living beyond your means
Living like this is incredibly stressful, but it’s the norm for a lot of people. Many of these people have the ability to cut back their spending but fall for things like lifestyle inflation, making it difficult to unlearn bad habits.
The good news is that with the solutions I’ve listed, you can start making changes today.
For even more support, join the private M$M Facebook group. This group is full of wisdom, motivation, and hilarious memes when you need a laugh.