Are you living paycheck to paycheck? Are you in debt? If so, you're not alone. A recent study found that 64% of Americans are living paycheck to paycheck. But just because it's common doesn't mean it's okay. If you're struggling to make ends meet, it's time to take a closer look at your spending patterns and make some changes.
Check out the 9 signs below to see if you're living beyond your means. And if you are, don't worry – there are steps you can take to get back on track and achieve financial success.
1. You have to borrow money from family or friends on a regular basis
If you’ve lost your job or been unable to work because of an illness or injury, it makes sense that you need help paying bills. But if friends and family are helping you out financially any time something unexpected comes up, you need an emergency fund.
Instead of going out to eat or shop, set aside some money to grow your savings account. Try one of these money-saving challenges to jump-start your savings. Keep $1,000 in emergency money for things that aren’t included in your everyday expenses.
2. You have poor credit
If you're like most people, you probably have a few bills that you pay late every now and then. While it may not seem like a big deal, paying late can actually end up costing you a lot of money in the long run. Late fees and penalties can add up quickly, and if you're not careful, you could end up damaging your credit scores. Here are a few tips to help you avoid paying late:
- Set up automatic payments – One of the easiest ways to make sure that you never pay late is to set up automatic payments for all of your bills. That way, you'll never have to worry about forgetting to pay or being short on cash.
- Keep track of due dates – Another helpful tip is to keep track of when your bills are due. You can do this by setting up reminders in your calendar or by creating a budget where you track all of your expenses.
- Communicate with your creditors – If you know that you're going to be unable to pay your bill on time, reach out to your creditor and let them know. In some cases, they may be able to work with you and give you an extension or work out a payment plan.
3. You can't afford to save for retirement or an emergency fund
Those who don’t want to work until they’re ninety need to make sure that they aren't one of those who are spending more than they make. If you can’t save at least 5% of your gross income, you are likely living above your means.
Most financial advisors suggest saving at least 10% of your gross income. If you make $100,000 per year at age 30 and you put 10% in a 401k, it’s possible to have close to a million dollars by age 65.
Get into the habit of paying yourself first, so your money goes directly into a savings plan. You’ll have less temptation to spend money that you never see.
Start by using an automatic savings app to save a small percentage of your money and gradually increase the amount and switch to a retirement account.
4. You're using credit cards to pay for everyday expenses
A good sign that you're living beyond your means is having a rising credit card balance each month. If you’re only making the minimum payment on your cards while you continue to charge, it’s time to make a change.
At one time I had $5,000 in credit card debt, it was an awful feeling. It was hard work erasing that debt, but I promised myself that once I got out, I would never let it happen again. Now I don’t charge anything unless I know I can pay off the balance when the bill comes. I use a check register to keep track of the money I put on my credit card, so I don’t overspend.
If you’re carrying a balance on your credit card, it’s time to create a budget and start paying off your debt. At the very least, make sure you are paying the principal amount and not just the interest on your card.
Making the minimum payments on $5,000 in credit card debt will cost you more than $8,000 and take close to 13 years to pay off.
5. Your housing costs are more than 30% of your monthly income
A house will probably be the biggest purchase you make in your lifetime, so it’s important not to take on more than you can handle.
As for monthly payments “according to the Federal Housing Association, a good rule of thumb is that most people can afford to spend 29 percent of their gross income on housing expenses.”
Take the total amount of money that you make in a month and multiply that by .29 if that total is less than your monthly house payment, you are probably paying more than you can afford.
For example, if your monthly income before taxes is $5,000, then your house payment or rent should be less than $1,450. Don’t forget to include insurance and property tax, which could add a significant amount to your monthly mortgage.
6. Your car is less than 5 years old
A lot of people struggle to pay their bills and put some money in savings because they think they don’t make enough money. The truth is a lot of people are struggling because their car payment is too high.
I made car payments for many years until I realized how much easier my life would be financially without that huge payment. Now I drive a car that’s over ten years, and I don't have a payment. I save money now and pay cash for my vehicles – saving is much easier without a car payment.
If you’re not ready to pay cash for a car then consider the following guidelines for financing that most experts recommend:
- Monthly car payments no more than 15% of your gross pay
- Down payment of at least 20% of the purchase price
- A car loan should be no longer than four years
For example, if your monthly income before taxes is $5,000, then your car payment should be less than $750. A 4-year loan with a 6% interest rate, will allow you to borrow about 32,000. Make a 20% down payment of $6,500, and your budget for a car will be $38,500.
7. You're buying things you don't need, like new clothes, gadgets, or furniture
If you’re completely broke before you get your next paycheck, it’s a good sign that you’re spending money on things you can’t afford. Things to consider:
- Do you need 500 channels to watch on TV?
- Could you pack your lunch instead of eating out?
- Are you buying too many clothes or shoes?
- Could you find a cheaper place to live?
Take a hard look at the difference between wants and necessities. One way to get back on track is to try a no-spend challenge. For 30 days don’t spend any money unless it’s an absolute necessity.
Buy groceries, and pay your bills, but no eating out, shopping, or going to the movies. Once you become aware of how much money you need to live, it will be easier to change your mindset about spending.
8. You’ve bounced a check
Not having enough money in your account to cover a check that you wrote is a good sign that you are living beyond your means. Banks often charge huge fees when you bounce a check. It’s best to try and avoid all banking fees if possible – including atm fees.
Some fees seem minimal; maybe the bank only charges $1.00 to withdraw from the atm. But fees add up, so it’s best to avoid them altogether. Keeping track of the balance in your checking is one way to avoid overdraft fees.
There are a lot of great apps to keep track of your checkbook balance. Some people find that paying cash for everything is an easier way to manage money. If paying cash is your preference, a cash envelope wallet may be helpful.
9. You haven’t set a budget
Creating a budget is one of the most critical steps to avoiding a financial problem and living within your means. People tend to avoid budgets because they think it’s like a diet where you deprive yourself to achieve your goal.
You can’t expect to get ahead if you don’t have a plan for your money. Creating a budget can help relieve the stress associated with bills and financial problems.
A budget will make you aware of where you’re money is going and give you insight into ways to make it go farther. If you ever hope to build wealth or achieve financial freedom, you need a plan.
Frequently Asked Questions (FAQ)
Why should we not live beyond your means?
It's important to live within your means for a variety of reasons. When you live beyond your means, you're spending more money than you have coming in. This can quickly lead to debt and financial hardship. It also puts a lot of stress on you and your family.
When you're constantly worrying about money, it's hard to enjoy your life. Additionally, living beyond your means can damage your credit score and make it difficult to get loans for major purchases, like a home or a car. In short, it's important to be mindful of your spending and live within your means. This will help you stay out of debt and keep your finances healthy.
What is considered living below your means?
There is no one-size-fits-all definition for living below your means, but in general, it refers to spending less money than you earn. This can mean different things for different people, but some common ways to live below your means include creating and sticking to a budget, spending less than you make, and avoiding unnecessary debt.
For some people, living below their means also means building up savings and investing for the future. While it may take some effort to change your spending habits, living below your means can help you achieve financial security and peace of mind.
The bottom line
None of us are perfect, we all have areas in our finances that we can improve. To avoid living beyond your means, it's important to check your financial health regularly.
Use the information from this post to diagnose and fix any problems before they get out of hand. Listen to financial podcasts and track your net worth to stay on track with your money.
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