The answer to the question “Am I Living Beyond My Means?” is personal and fluid at different times in your financial life. But if you can answer “yes” to any of the six statements, there’s a good chance you might be.
1. You don’t have six months worth of your income saved.
If your savings account balance isn’t at least as much as what you bring home each month in income (after taxes), pump the breaks on your expenses and focus on saving. If you lose your job, have a medical emergency or other disaster, this money is your lifeline. It will keep you out of debt, and keep you financially afloat until you can start earning income again. One note of caution: This figure applies only to people with relatively stable income and job security. (Which of course, is but an illusion). Business owners, contractors and freelancers should have twelve months worth of income saved.
2. You vacation on credit.
If you can’t afford to pay for your vacation in full with cash, you can’t afford the vacation. This is not to say you shouldn’t charge the expenses related to it for the credit card rewards and travel protections; it means you need to plan for all the expenses your trip will trigger in advance, and make sure you’ve saved for them. Otherwise, your homecoming will include a very large, very unexpected credit card statement — and who wants that after a week free from the grind? That $14 poolside drink is already overpriced — there’s no reason to up its cost to $20 or more by putting it on a credit card whose balance takes you months to pay off.
3. You decide which car you can afford based on monthly payments.
It’s important to make sure you can afford the monthly payment amount if you finance or lease a car — but the total purchase price is the real number that indicates whether you can actually afford what you’re buying. Remember that financing a car or leasing one doesn’t mean you own it; you’re essentially renting it. If you stop making payments on it before you’ve paid it off, you could be left with nothing.
Instead, calculate whether you can afford the car based on a loan that’s no more than three years in duration, and results in your owning the car outright.
4. You decide how much home you can afford based on a 30-year fixed mortgage.
Instead of strapping yourself to a 30-year fixed mortgage payment, consider how much more affordable a less expensive house with a shorter loan term is in the long run. Sure, you’ll have a higher monthly payment, but you’ll save a boatload of money in interest payments. A homeowner with a four percent, 15-year fixed mortgage on a $250,000 home loan, for example, could save nearly $100,0000 in interest over the life of the loan compared to what he’d spend for the same loan spread out over 30 years. Plus, he’ll own the home in full in less than two decades.
5. You’ve paid an overdraft fee in the last 12 months.
If you have to rely on overdraft protection to float your lifestyle, you’re living beyond your means. (It may also mean it’s time to look for a new bank, or at least a bank account that’s better suited for your financial needs).
6. You’re in debt but pay someone to do chores you could handle.
Yes, time is money, and yes, some expenses like childcare, or car or home maintenance may require the help of a professional. But if you’re paying someone to clean your house, mow your lawn or do your nails when you’re stuck in credit card, it may signal that you’ve settled into a lifestyle beyond your means. Instead of paying someone to do these tasks, put the money you save toward paying down debt, building your emergency savings accounts and retirement funds — -at least until you get your financial house back on track.