In our ever-so debt-driven society, it’s a little bit too easy to make a purchase. Pull out that plastic, swipe the machine, and we’re on our merry way. The days where “cash is king” are a thing of the past, which makes reckless purchasing even easier. Along with that, social pressures are so prevalent, thanks to the internet, that has us wanting to keep up with the Jones’ across the street.
Are you living beyond your means? Many (or even most of us) are. Here are a number of self-checks to see how you rank, as well as steps to fix your excess spending.
Are you saving at least 10% of your after-tax (takehome) income?
A general rule of thumb is to save at least 10% of your after-tax take home pay. If you can go higher than 10%, by all means, please do so. However, many feel that even 10% is stretching their budget too thin. If you bring home $2,000/month, 10% comes out to $200. If you can’t devote that money to your savings account, that’s a good indicator that you’re living beyond your means.
Let’s start with some baby steps, though. These savings can come from a variety of sources, such as your company-matched 401k, or other retirement funds. But I would urge you to push even further, and stretch yourself to save 10% on top of retirement funds.
Do you have an emergency fund?
Once of the biggest reasons to save at least 10% of your take-home pay is to have a nice nest-egg set aside for the unexpected. These should be devoted to an unexpected car repair, or for the compressor going out in your refrigerator. These funds are NOT to be used for a vacation, a new car, or a shopping spree.
A great starting point is $1,000 set aside. It may take a year or two, or even longer, but work hard at getting those savings account to at least 3 months worth of living expenses.
Putting emergencies on a credit card or taking out a loan simply continues the cycle of living beyond your means.
Are you living paycheck to paycheck?
Seventy-eight percent of full-time workers said they live paycheck to paycheck, up from 75 percent last year, according to a recent report from CareerBuilder. That’s absolutely absurd. Knowing that you wouldn’t be able to survive for even a month without a paycheck, should you lose your employment, is a perfect indicator that you’re living beyond your means.
Everyone feels that they do not make enough money to set aside an emergency fund, but it doesn’t come down to how much work is paying you. Your money problems are a you problem. If I were to sit down and look at your finances, I’m positive I could discover a few areas that could be improved.
Do you borrow money from friends and family?
Borrowing money from family and friends, or taking loans to pay your bills, should be the biggest warning sign of all. Going into debt to pay off your debt doesn’t fix the problem, it simply prolongs it.
Whether or not you have the intend to pay back your loved ones, that’s territory I don’t like to enter. Keeping healthy relationships and family ties should be more important than a couple hundred dollars.
Do you (or can you only) pay the minimum payment on your credit cards?
Let’s do some math, shall we?
Assume you have a balance of $3,000 on a credit card (which I’m going to guess is still less than many of my readers have). At the national average of 14.9% APR for a credit card, paying only the minimum payment of 4%, it would take 8 years and 8 months to pay off that card. And that’s assuming you don’t make any additional purchases on said card. Not to mention, you would pay over $1,200 in interest.
I’m absolutely an advocate of using credit cards for reward points, but if you can’t easily pay off your entire balance within 2-3 months, or don’t consistently pay off your balance in it’s entirety, you’re most likely living beyond your means.
Solutions: You’ve got this
If you find yourself nodding your head and saying, “That’s me” to any of the above, don’t fret. We’re here to help. There is a light at the end of the tunnel, and you can work to wrangle your finances.
Create a budget
Ew. The dreaded “B” word. Yes, you’re going to have to sit down with pen and paper (or an excel spreadsheet, if you’re nerdy like me) and evaluate your expenses.
A budget is the perfect way to reign your finances in and finally get them under control. On one side of the page, list all your expenses and debt. I want everything. This doesn’t include just money you owe to people. This includes every cup of coffee, and every trip to the mall. Leave no dollar unaccounted for.
On the other side, list your income. This could be just yourself, or both you and your spouse, if you’re married. List any side income you may be bringing in from freelance work or odd jobs.
If your income is higher than your expenses, that’s great! Find areas where you can cut back even more.
If your expenses are more than your income, we’ve got a problem and need to find some areas where we can quit spending. If your expenses are more than your income, you will never increase your net worth and finally get ahead.
If you’re up to your neck in debt, consolidation might be an option for you. I’m not a huge proponent of debt consolidators, as they generally leave me feeling “slimy”, but they do help for some.
Instead of paying 12% on your car, 21% on your first credit card, and 18% on your second credit card, they’ll combine all your debt into a single monthly payment with a (generally) lower interest rate.
Pay Yourself First
What do you do when the month stretches too long, but the paycheck doesn’t stretch enough? People will often tell themselves, “I’ll pay all my bills, and then if I have anything left over, I’ll put it into savings.” There will never be enough left over at the end of the month.
For this reason, you need to pay yourself first. This means that the first thing you do once you get your paycheck is take a portion out and put it into either savings or an investment account. It doesn’t need to be a lot, but shoot for the 10% that we talked about earlier. Everything left over goes to your bills. YOU are number one. YOU work hard for your money, so you need to take care of yourself first. Setting aside a small amount seems like it won’t do much, but invested over years will allow it to quickly add up.
If you answered “Yes” to any of the above questions, it’s okay. We all have to start somewhere. But you goal for the future is to one day be able to proudly shout “NO!” to all of them. Living beyond your means “looks” fun, but I promise you’ll be able to sleep better at night knowing your finances are in check. Once you can do that, you’ll know you’re well on your way to living financially independent.