To live beyond your means simply means that you are spending more than what you can afford. Statistics show that most people are living from paycheck to paycheck without any kind of financial cushion. This was quite evident on the effect of the recent lockdowns on people’s financial lives. While we all deserve to spend our hard earned income; spending beyond our earnings, not saving enough for emergencies and racking up debt in the process are all recipes for financial disaster. To prevent this from happening, you need to watch out for some warning signs that you are living beyond your means. Even if you were doing fine before the pandemic, you might still need to reassess your finances to check if your current income can still support your previous lifestyle.
It is quite easy to fall prey in this age of consumerism. A wide range of consumer goods are available everywhere in the malls, supermarkets, social media and online stores. With heavy promotion by the media coupled with the support of the banking system through their generous credit to consumers; living beyond your means is so easy to do these days.
The FOMO (fear of missing out) and YOLO (you only live once) mentalities brought about by social media only made matters worse. These mentalities have become the new norm that they have dictated the spending habits of many. While it gives you satisfaction in the present, it gives disservice to your future well-being.
Warning Signs That You Are Living Beyond Your Means
Before it is too late, here are some key indicators that you are living beyond your means. They will serve as warning signs that it is time to scale back on your spending immediately.
1. More than 30% of your Income Goes to your House
Housing is the largest expense of most households. Most people dream of a big nice house thinking that they are buying an asset. However, most people don’t realize that their primary home is no longer considered an asset but rather a liability.
Unless you have a way of lowering your monthly expenses on other parts of your budget, you will find yourself in the poverty cycle if you are spending more than 30% of your income on your house. The allure of a bigger and better house will become a financial problem.
Now, calculate what percentage of your monthly income goes to your housing expenses. Housing expenses include your monthly amortization, real estate property taxes, association dues, house insurance, maintenance costs and utilities. If the amount exceeds more than 30% of your monthly income, you will be much better off finding a less lavish home that will fit your budget.
2. More than 15% of your Income Goes to your Car
If you can purchase your car for personal use in cash, then there is no problem. Problem arises when you borrow money in your auto loan purchase.
Have you heard of the 20/4/10 Rule on Auto Loan? The 20/4/10 Rule keeps your finances in check when it comes to purchasing a car. The rule says if you are going to buy a car, you need to make at least a 20% downpayment. In addition, the terms of payment should not exceed 4 years and that your monthly amortization should not exceed 10% of your monthly earnings. If you cannot follow these rule, it simply means you are buying a car that you cannot afford.
- Minimum 20% downpayment
- Maximum 4 years term
- Monthly payment should not be greater than 10% of income
If you add up all other transportation expenses like fuel, maintenance costs, insurance and your monthly amortization; the total should not exceed more than 15% of your income. If your monthly transportation expense goes beyond that, you are simply living beyond your means.
3. Overdue Notices Fill Up your Mailbox
If you have been receiving late payment, overdue and disconnection notices, or worse you find your utilities constantly disconnected; then that’s clear sign that you are living way above your means. Your monthly budget should include payments for bills and utilities. If you can’t pay for them then it is time to reevaluate which ones are necessities and which ones you are better off without like cable subscription for example.
4. You Borrow Money from Others
If you find yourself borrowing money from friends and relatives or take out personal loans to pay your bills then that is a clear sign that you cannot afford your current lifestyle. Ideally, your income should be enough to cover your day-to-day expenses.
5. You Constantly Worry About Money
You are constantly worried about money, even with small expenses to the point that it is already keeping you awake at night. Your health is already affected. You even get into strenuous discussions and arguments with your spouse.
It is normal to worry about your finances every now and then but if you are constantly experiencing these things on a daily basis. Then, it is so obvious that you have money problems.
6. You have No Savings / Emergency Fund
You have no savings or emergency fund. Even if you have it before the pandemic, you have already used it all up. There is no money left from your current income to set aside for future savings.
Savings are needed for future use. An emergency fund is for unexpected and unfortunate events like a pandemic, unemployment, illness, disability or simply for car repair purposes. Ideally, your family should have enough money saved to cover at least six months worth of your living expenses.
7. You have Rising Credit Card Balances
If you are one of those people who only pays the minimum amount due on your credit card balance every month, then that’s a sign that you are living beyond your means.
Ideally, you should only charge what you can pay off at the end of each billing cycle. Unfortunately, many people have severe problems with credit card usage. If you don’t pay the total amount due on or before your due date, your outstanding balance will charge additional interest rates and fees, and these are carried over every month causing your debt to balloon month after month.
8. You Never Set A Budget
If you are ask questions about your budget like how much do you spend on food each month and you have no idea what the answer is, then you have a problem. A written budget is one of the first and most important steps towards financial freedom. How will you know if you are living within your means if you have no idea where your money is going? Having financial goals and sticking to your budgeting plan can prevent money leaks and help you live within your means.
9. You Run Out of Money Before your Next Paycheck
Do you find yourself short of cash long before the next payday? If you do, then that is another sure indicator that you need to downgrade your lifestyle. Your paycheck should be enough to cover your expenses for the period.
10. You Shop / Vacation on Credit
Credit is good when used wisely. It is very convenient because you don’t need to pay in cash for the total cost of an item or service right away. It is fine to avail of zero percent installment offers just as long as you are sure that there are no hidden charges. The rule of thumb is that your payment terms should not exceed the total life span of the item that you are buying.
It is a whole different thing for trip purchases. Yes, you can go on that well-deserved vacation only if you have saved enough for it. Make a plan to save money for that dream vacation.
You can use your credit card for protection. Like for example, some credit card offers free travel insurance if you book using their card. All other vacation expenses should be paid in cash. You can also use your credit card during vacation but for emergency purposes only. If you are one of those people who loves taking vacation all on credit, then you are living beyond your means.
If you score at least four and above, then take it as a warning sign that you are living beyond your means. You have two options, either you increase your income or downgrade your lifestyle. But whatever your choice is, it is best that you start learning financial literacy now to avoid finding yourself in the same situation later on.
Edited Version. First Published in Pinoy Smart Living on 10.30.2018