Have you ever found yourself in a situation where you’re stressing about money week after week and can’t figure out why? Well, the simple answer is: you’re living beyond your means. And the simple solution is to stop living beyond your means.
But that’s a lot easier said than done, and it’s a very broad statement. Unfortunately, the majority of America does not seem to understand how much of an issue this is. So let’s take a look at some statistics.
According to a survey in October 2020 of 2,000 Americans, more than 2/3 of Americans are living paycheck to paycheck, and that number only continues to rise. This is a strong sign that most Americans need to take a step back and pay attention to this financial epidemic.
The best way to attack this issue is first to be aware of what we’re doing that’s causing the issue. Living beyond your means is the start of a downhill domino effect into a paycheck-to-paycheck life.
So how do you stop living beyond your means? It seems like something that’s a lot easier said than done. In order to put this in an attainable perspective, I have outlined the top 7 common issues that people who live beyond their means experience.
Not Having an Emergency Fund
Your emergency fund is the foundation of your financial freedom. If all else (job, investments, properties, etc.) goes downhill and no longer produces you any more income, your emergency fund is there to make sure that you don’t dig yourself further down into a hole.
It’ll take care of your mandatory expenses for a period of time until you pick yourself back up and get some steady income coming in again.
Ideally, your emergency fund should be enough to cover 3 to 6 months of mandatory expenses. By having this, you won’t be taking out loans and getting into more debt when a financial emergency arises.
If you are spending your money on unnecessary items or several nights out instead of saving some money toward an emergency fund, you are putting yourself into unnecessary financial danger.
Carrying Balances on Credit Cards
While I’m a big fan of credit cards, I am not a fan of irresponsible credit card use. Credit cards should be used responsibly so that you can reap the benefits of points, cash back, miles, and more. They are a tool to help you build wealth.
However, you can’t build wealth if you’re digging yourself into credit card debt. All because you’re letting your balances carry over month after month. What’s worse, the majority of credit cards compound your interest on a daily basis. This means that your interest is added to your principal (original) balance at the end of every day.
Letting these balances carry over can lead to excessive charges from your credit card issuer. If you’re in this situation, pay them off and get rid of them immediately before you dig yourself further in the hole!
Not Saving at Least 15% of Your Income
Having money saved up is as crucial as having income coming in. Saving as much of your money as possible for certain goals is vital, but a general rule of thumb by several CFPs is to save at least 15% of your income. 10% for retirement, and 5% for specific goals (emergency funds, a home downpayment, etc).
Keep in mind, this is a general rule of thumb, I’m all about making personal finance as PERSONAL as it can be. So depending on your goals, you may have a different saving requirement that needs a little more contributions. This rule of 15% is not a one-size-fits-all.
However, if you aren’t even saving the minimum, then you’re putting yourself into unnecessary financial danger. Your first saving objective should be your emergency fund, once you get that where it needs to be in funds, you can focus on other savings goals.
Remember, putting things into one-by-one steps will make everything a lot easier than overwhelming yourself with countless goals that spread you out too thin.
Loans & Borrowing from Relatives
This ties in with credit cards a bit but focuses on a broader view of borrowing money.
Asking to borrow from a relative like mom and dad might be helpful for short-term concerns. But if you find yourself continuously doing this, it might be a pointer that your lifestyle is not affordable to your means. Meaning that you are living beyond your means.
The necessity of taking other loans, such as payday loans, might also be a huge indicator that you’re not living below your means. Payday loans are one of the worst financial decisions you can make.
According to The Pew Charitable Trusts: “The average payday loan requires a lump-sum repayment of $430 on the next payday, consuming 36 percent of an average borrower’s gross paycheck. However, research shows that most borrowers can afford no more than 5 percent while still covering basic expenses”. Payday loans are simply not affordable.
In the end, it’s really as simple as this: if your lifestyle requires you to borrow money in order to afford it, then you need to reevaluate your expenses. Put yourself in a position where you can afford everything with your own income. In other words, stop living beyond your means.
Cashing Out Retirement Accounts
Retirement funds are specifically for what their name implies: retirement. If you’re taking out money from your retirement account, you run the risk of paying a penalty for taking that money out early, depending on the type of retirement account it is. You also miss out on the leverage of compound interest.
If you need to take out money from your retirement accounts to afford your life, or you simply can’t afford to contribute to a retirement account because of lifestyle expenses, then this is another sign that you are living beyond your means.
Retirement money is for retirement. Not your spontaneous vacation, not for your emergencies (that’s what your emergency fund is for), not for your poor Christmas planning, or for anything else except retirement.
This one is probably pretty obvious but you’d be surprised how common this is in America. Nothing says, “stop living beyond your means” like overdue bills do.
A mailbox and voicemail box full of overdue bill notices is not only an indicator of poor money management. It is also a painful source of stress that does nothing else but make your life distasteful.
You know very well that you have some guilty pleasure(s) that you waste your money on. Start cutting them off, at least temporarily, until you can catch up on your bills and find a smarter way to put those guilty pleasures on your budget.
Minimum Payments on Debt
I know that credit cards give this option, but it’s always best not to take it. If you’re in a situation where you cannot afford to make more than the minimum payments on your debt, then it’s another big sign that you’re living beyond your means.
Paying off more than the minimum on your debt will enable you to pay off your debt much more quickly. The objective is to be completely out of debt, so why are you making the least amount of payments and slowing yourself down to that goal? Let’s get those debts paid off ASAP by lowering our cost of living.
I know that sometimes, as individuals, we may consider unnecessary things as a “mandatory expense”. But this is a point where you have to sit down and reconsider your priorities. Is your Netflix really a priority when you can hardly afford this month’s rent?
Or is that PS5 really worth the grocery list that you need to have next week to eat? Or what’s the point of that monthly gym membership if you’re only going to the gym twice a month?
Your priorities are your food, shelter, and transportation. If you cannot (or can barely) afford those, then you need to cut back on other expenses or find ways to make more money so that you can afford the lifestyle you want.
It’s easier said than done, but making extra money is not as hard as it might seem. I’ve made a list of easy online side-hustles that you can get into to start making extra money.
If online side-hustles aren’t your thing, go ask your neighbor if they need their lawn mowed or their snow shoveled. If you’re creative enough, there are endless ways to make extra money.
If you have any personal experiences or questions for me, please feel free to leave them down in the section below! I always respond to each of you!