THE BROKEN WALLET

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What does “living above your means” really mean?!?

Living above your means is one of the worst financial mistakes you can make. It might not seem like a major problem. Yet, living above one’s means makes it difficult to hit many important goals. You might have more consumer debt, less money in savings, or struggle to pay everyday expenses. 

So, how can you tell whether you’re living above or within your means? Here’s a look at a few telltales signs. 

1. You’re spending more than 30% of income on housing

As a general rule of thumb, you really shouldn’t spend more than roughly 28% to 30% of your gross monthly income on housing. So if you earn $3,000 a month (or $36,000 a year), you should cap your housing at $900 a month. 

To be fair, though, finding affordable housing isn’t easy in certain markets. For this reason, you might have to look into other options — as unattractive as they might seem. These can include living home with your parents a little longer, if feasible, or perhaps splitting the expense with roommates.

In the end, spending too much on housing makes it harder to save an emergency fund, pay off debt, and enjoy experiences.

2. You use credit cards out of need

There’s nothing wrong with using a credit card. A credit card can help build or improve your credit history. And sometimes, it’s safer to use credit compared to cash or a debit card.

However, using credit regularly for necessities like food or gas — or even paying your bills with a credit card — can indicate a problem. More so if you’re unable to pay off your balance in full each month. 

Relying on a credit card means that your monthly expenses exceed your take-home pay, in which case you’ll have to make adjustments to avoid getting deeper in the hole.

3. You’re driving a car you can’t afford

When buying a car, some people gauge affordability by whether they’re able to make their car payment each month. 

Yet, the ability to stroke a check doesn’t necessarily mean that you’re able to afford the car you’re driving. Keep in mind, this expense goes beyond the actual payment. 

As you purchase more expensive vehicles, the total cost of ownership increases, too. For example, you’ll likely pay more for auto insurance and maintenance. And if you live in a state with personal property taxes, owning a more expensive car means paying more in taxes.

You might be living above your means if you can swing the monthly payment, but you have trouble paying other expenses associated with the vehicle.

4. You don’t have a solid savings

I can’t stress enough the importance of planning for the unexpected and having a savings — both an emergency fund and a retirement account. Even if you don’t have a lot of extra money, saving something is better than nothing. And trust me, you’ll thank yourself. 

So if you have nothing (or very little) in your retirement account or emergency fund, or if you’re saving less than 5% of your income, this is another sign that you might be living above your means. Especially if you have money for “everything else” such as shopping, vacations, and entertainment. 

It only takes one job loss, injury, or major illness to cripple your finances, so make sure you have a safety net. Evaluate where your money goes, and then brainstorm ways to cut back so that you can afford to save. 

5. You don’t have a budget 

A budget is crucial to personal finance, and without one, you’re more likely to overspend and save less. 

Yet, some people never track their spending and basically “wing it” when it comes to their money. However, a budget is one of the best ways to keep your finances in the right direction. 

You’re forced to take a hard look at what you have coming in and going out — and from here you can make adjustments. If you don’t have a plan for your money, there’s really no way to gauge whether you’re living within your means. 

6. You’re living paycheck to paycheck

Granted, some people have an income problem. In which case, even if they live simple, they just don’t earn enough to keep up with the cost-of-living. 

On the other hand, some people DO EARN ENOUGH. Yet, they’re always playing catch up. If you can relate, there’s a good chance that you’re living above your means. 

One thing I learned from watching the Suze Orman show years ago is that people can be broke and all income levels. 

I can’t tell you the number of multiple six-figure couples I heard calling into her show asking for advice because they were struggling to pay their bills. And honestly, this was hard to wrap my head around. 

But after these people provided a breakdown of their expenses, it became very clear why they were in a tough situation. Often times, it was self-induced and these people were living way above their means. 

So my point is, don’t think you don’t have a problem just because you earn a lot of money. Like many people you might live in a house or drive a car that you technically can’t afford.

7. You care too much about what others think

Never allow another person’s definition of success to influence your spending decisions. And most importantly, stop comparing yourself to others.

If you buy things or live in certain neighborhoods to impress others, you end up losing in the end. You have to deal with the financial repercussions of keeping up with the Joneses — not them.