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Can you afford your lifestyle?
Living beyond your means is very easy to do in our ultra-consumer, debt-driven society. All we have to do swipe a piece of plastic and go on to the next purchase. The days of using cash to pay for everything is pretty much long gone, which makes reckless spending much easier. Additionally, social pressures are an overwhelming present contributing factor.
Here are 9 big red, warning signs that you are living beyond your means:
1. You have no money in an emergency savings account.
Everyone should have at least 3-6 months saved up for emergencies, but 6-9 months is more ideal. Otherwise, an unexpected bill will easily go on a credit card and lead you further into debt.
2. You are not saving at least 5-10% of your after-tax income.
It is actually advised to save at least 10-15% of your income, but if you can’t even save 5% then you are probably living beyond your means. This includes saving for retirement as well.
3. You are living paycheck to paycheck.
This can be a vicious cycle. Many people believe they do not have the required salary to set aside savings. Very often, the problem is that people really have no idea what they’re spending all their money on — and it becomes very easy to spend the money you planned to save.
4. You borrow money from friends, family, or worse… take out payday loans.
Have you seen all those payday loan and cash advance places? Believe it or not people actually take out loans to pay their bills. These places charge a fee of $15-30 per $100 borrowed (usually needs to be paid back in 2 weeks). These loans usually cost 400% APR. Another pretty vicious cycle.
5. You carry a balance on your credit card.
It’s common to use a credit card as your primary method of payment nowadays. However, if you carry a balance month to month, you’re probably spending more than you can afford.
6. Overdue notices are consuming your mailbox or voicemail box.
Do you leave unopened bills on the table frequently because you know you cannot pay them? At the end of the month, do you have to make a decision on which bills get paid? At this point you are definitely living beyond your means, in over your head and need to seek help.
7. You lease a car, instead of buying it.
A major financial red flag is leasing a car you cannot afford to buy outright or by financing it. You are in fact renting a temporary lifestyle that will end up requiring you to put down more money that you could have applied to buying/owning a car.
8. Your credit score is below 600.
The credit bureaus (Equifax, TransUnion and Experian) keep track of your payment history, outstanding loan balances and legal judgments against you. In general, if your credit score is below 600 that means that you are probably in over your head and up to your eyeballs in debt.
9. You spend more than 28% of your gross pay on your mortgage or rent per month.
The rule of thumb is that your monthly housing costs should not exceed 28% of your gross pay. If you pay more than that, your home is likely too expensive for your current earnings. In addition, buying a home with less than 20% down is a sign you have not saved enough money to purchase a home, or are buying “too big” of a home.
Here are some great solutions:
1. Create a budget.
A budget is a great way to evaluate your expenses and income. Look for ways to cut expenses such as reducing entertainment, eating out, and shopping for things you don’t need. I like to use Mint and Personal Capital.
2. Set up your emergency fund before aggressively paying off debt.
You need to always be prepared for emergencies. If you are living paycheck to paycheck, paying down debt and then an emergency occurs you will end up taking on more debt… the exact opposite of what you want. I recommend starting with 1-2 months of monthly expenses in savings and then start aggressively paying down your debts. Once debt free, save at least 3-6 months of expenses.
3. The avalanche method to paying off debt.
Credit cards are usually a great place to start due to their high interest rates. It is always best to start with the highest interest debt and work your way down. I used this method to pay off my student loans in 25 months. I prefer this method over the snowball effect, because this saves you more money by tackling high interest rates first. I also prefer this over consolidating debt if you have credit card debt, but sometimes consolidating student loans is more advantageous.
4. Cut up those credit cards and start using cash.
Using cash is a great way to stick to a budget. Why? You can only spend as much as you have. Plus, studies have shown people are more frugal and spend less when using cash rather than credit cards.