Signs That You Are Living Beyond Your Means
| July 23, 2008 | Posted by Roshawn Watson under Uncategorized |
By: Roshawn Watson
Investopedia recently proposed 5 signs that you are living beyond your means. Living beyond one’s means can derail the finances of even some of the highest earners. Just ask many of the countless celebrities and athletes who have filed for bankruptcy or have been foreclosed on.
The first signpost: A Credit Score below 600.
In general, this is valid because of our culture of debt. Thus, a poor credit score is often an indicator that one’s debt is out of control. Still, a high credit score in itself is not reflective of winning financially. Remember, the only way to have a high credit score is to have a history of debt. As one borrows less over time, as is the case for those operating on a mostly cash system, eventually the credit score will go down even though they are more solvent financially. Granted those who fit this category are in the minority, the impression that high credit score in itself denotes financial stability is misleading.
The second signpost: You are “saving” less than 5%
One should invest at least 15% of his or her gross income for retirement. The caveat is that this is difficult to do with too much debt. As recently as 2005, the US national savings rate was -0.5% (only an economist could calculate a negative savings rate). This means we collectively spent more that we earn and were not saving anything. It is very important to make sure that you do not work for 30 years and have nothing to show for it due to little to no investments. You can’t afford not to invest.
The third signpost: Your Credit Card Balances are Rising (or Stagnant)
Although I agreed with this one, I would add in other debt balances too are rising or stagnant. In 7 Disastrous Debt Habits, we discussed how while paying minimums is better than doing nothing, it is unlikely you are making much traction with respect to decreasing the principle. Look at the following illustration by Smart Money Magazine (September, 2007)…
Say you’ve got $10,000 in credit card debt at 15 percent: if you make $1,000 monthly payments, rather than the $250 minimum, you’ll save more than $3,000
No one is saying that making large payments is easy, but it definitely supports doing above the minimum due. It is notable that people use to (some still do when possible) move their debt to their homes (through HELOCs) or from their former cars to their new cars. Lately, another disturbing trend is becoming more prevalent: many cash-strapped consumers are even raiding retirement accounts. The healthy penalties and taxes one pays hardly make these loans worth it (except perhaps to avoid bankruptcy or foreclosure)
The fourth signpost : Spending more than 28% of Income on a House
By spending more than 28-30% of one’s gross monthly income on a house payment, one can easily become house poor. To accelerate your wealth-building, you may consider an even more conservative approach: not getting a mortgage exceeding twice your annual income. In some markets, this is incredibly difficult. However, by increasing your commute within reason, sometimes one can achieve a more reasonable mortgage without sacrificing too much additional travel time.
The fifth signpost: Your Bills are Spiraling out of Control
Evaluating your spending is crucial. The cumulative “small” monthly expenses add up and can tremendously diminish your cash flow. Although seemingly insignificant, these expenses can wreck havoc on your finances long-term. Sometimes sweating the “small” things can save you a fortune.
Your recognition of such signs can be the difference between a minor setback and a big financial mess.
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Related Posts
7 Disastrous Debt Habits
Overdue Consumer Debt Skyrockets
Free Yourself From Babylon
The Other Debt Crisis: Surging Credit Card Usage
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.
"The impression that high credit score in itself denotes financial stability is misleading."I totally agree with you Roshawn. I am 100% debt-free and I don't intend to ever owe a debt again in my life. I operate on a completely cash based system. Every moment of debt-free living drops my credit score. While it might suggest financial instability to creditors/lenders etc, it really translates to my ability to pay cash for not only my needs but my toys. I laugh at all those commercials about how to boost your credit score. When peoope realize what it means, ie that you love debt and being broke, it is my hope that they'll start to change their way of operating.
Great comment. Hopefully, you are encouraging others. Thanks for sharing
My credit score is below 600, I am saving 0%, and I am spending more than 50% of my income on rent.So what's the solution?
There are generally only two ways to fix a budget deficit: decrease expenses or increase income. I would consider moving (if that's an option for you and your family). Are there factors keeping you in this apt/house? Moving, perhaps further a way, may give you substantial savings in rent. Also, you may consider picking up an extra job (temporary fix) or changing jobs to one that pays better. Although we didn't get into the specifics of your financial situation, it sounds like if you could earn a few extra hundred a month, it would go a long way. If you are in a relationship, consider working out a strategy with your partner by which you can increase your income over the next year. Good luck.
Not getting a mortgage exceeding twice your annual income? Where do you live. In my area, one bedroom start at more than five times my annual salary. And I make a decent amount of money. I'd have to make at least 250k a year to afford an actual house by that measure. (And people wonder why the housing market is dead)
Although the national median home price last year was about 217K (realtor.org), you can see from the following link that even if one's family made a modest income of $75K, there are still several places where one can purchase a house for $150K.http://www.realtor.org/Research.nsf/files/MSAPRICESF.pdf/$FILE/MSAPRICESF.pdfThat specific recommendation was taken from Millionaire Next Door. Typically, that's what most "average millionaires" do.
This post has been included in the 141st Festival of Frugality at Almost Frugal, going live September 2, 2008. Please make sure to link back to the Festival and or submit it to sites like Digg, Stumble Upon, PF Buzz etc. Thanks for participating!
This post was included in the festival of frugality on 9/2/08. Feel free to check out some other great articles as well at the link below.http://almostfrugal.com/2008/09/02/festival-of-frugality-2/