Living beyond your means is easy to do in a debt driven society. All we need to do to purchase an item these days is swipe a credit card and on we go to the next purchase. The days of using cash are numbered which makes reckless purchasing even easier. Additionally, social pressures are ever-present thanks to the internet which are contributing to the financial instability we see globally.
If you believe you may be living beyond your means, here are ten warning signs and some solutions to overcome these challenges:
1. You are not saving at least 10% of your after-tax income
We are all advised to save at least 10-15% of our income but if you can’t even save 10% then you may be living beyond your means. It is important to note that any savings is included in this number whether it be 401(k) contributions, emergency fund contributions, investments or deposits into your bank account.
2. You have no emergency fund/savings
Part of the reason you need to save at least 10% is to have cash set aside for the inevitable emergency. Putting emergencies on your credit card or taking out a loan will continue the cycle of living beyond your means. It is advised that you have 3-6 months worth of your monthly expenses set aside.
3. You are living paycheck to paycheck
Do you know that 76% of Americans lived paycheck to paycheck in 2013? Many of these people believe they do not have the required salary to set aside savings or cannot afford to reduce their current lifestyle. While I find this hard to believe, we all have a few expenses we can cut back on.
4. You borrow from friends, family, or worse… take out loans to pay bills
Believe it or not, people actually take loans out to pay their bills. In other words, they are taking on more debt to pay the debt they already have. Logical, right? This is a clear sign that you cannot afford your current lifestyle.
5. You can only afford to pay the minimum balance on your credit card
We all have a tight month every so often but if you find yourself constantly paying the minimum payment you will see your monthly minimum payment skyrocket as the average interest rate on a credit card is 15%. If you only do this once it can be forgiven but if you live your life paying the minimum payments you should reevaluate your current lifestyle.
6. Overdue notices consume your mailbox
You cannot close your mailbox or find space on your desk as there are envelopes from creditors everywhere. At the end of the month, you must make a decision on who to pay and how much to pay them. At this stage, you are definitely living beyond your means and need to seek help.
7. You take a loan out to vacation
We all want to enjoy life but if you find yourself taking a loan out to go on a vacation as you do not have the funds you may be living beyond yourself. Ask yourself, "do I really need this right now?"
8. You cannot afford the essentials
If you find yourself not being able to afford food, toiletries, and clothes there is no question that your money is being used inappropriately.
9. You spend more than 30% of your gross pay on your mortgage
The rule of thumb is that your monthly mortgage payments should not exceed 30% of your gross pay. If you pay more than 30% your home is likely too expensive for your current earnings.
10. You are afraid your friends will judge you
Social media can be the devil to your wallet. Ever find yourself buying items to please others? Buying items to post a picture on Facebook, Snapchat, or Instagram can be a costly habit… and to those thinking this does not happen it happens all the time, ask Bobby about the number of new cars his friends buy for social media.
Evaluate what you really need and stop pleasing others. As M$M would say… maybe it is time to pass them up.
Find yourself falling under any of these warning signs? Here are some solutions to help you live within your means and improve your financial situation:
1. Create a budget
A budget is a great way to evaluate your expenses and income. The only way to create an effective budget is to be honest with your spending habits. Look for ways to cut cost such as reducing entertainment, eating out, and extra cost such as cable or high phone carrier bills.
2. Refinance student loans
Refinancing student loans isn't right for everyone, but if you have a steady job, a high-interest rate on your loans, and don't plan on using any federal benefits like income-based repayment - it may be right for you. Credible is a great tool to find out if you can receive lower interest rates on your student loans.
3. Get a side hustle
How much easier would it be if you had an extra $1,000 - $2,000 per month coming in from a small side hustle? You could pay off debt sooner, bulk up your emergency savings, or even use the cash to take an extra vacation without having to put it on a credit card. There are a lot of side hustle options out there, but running FB ads for local businesses is my top side hustle recommendation right now.
You can charge great money per client, do all of the work from home, and most importantly - the barrier to entry is low for beginners.
4. The snowball effect
This method is relatively simple, pay off the smaller debt first and make your way up to the bigger bills. This method may not be the most effective method but it helps provide motivation towards debt freedom as you feel accomplished every time you eliminate debt. It is important to note that
It is important to note that high-interest debt should usually be paid off first. Credit cards are usually a great place to start due to their high-interest rates. If you are a highly motivated individual, it is always best to start with high-interest debt and work your way down, this is also called the avalanche method.
5. Throw away the credit card and use cash
Using cash is a great way to stick to your budget. Why? You can only spend as much as you have. Swiping a credit card is easy but limiting yourself to a specific amount of cash is an effective way to get your spending habits in line with your spending goals.