Are You Living Beyond Your Means?

Many financially savvy people understand that how you spend money is more important than how much money you make.

Here are some signs that you may be living beyond your means. Being aware of these signs can help you keep your financial goals and protect you in case of emergencies.

• You don’t have an emergency savings fund. The general rule of thumb is to save between three and six months’ worth of your living expenses. This number can change based upon your personal situation. It is easy to underestimate life’s uncertainties and the need for cash for unexpected events, such as losing your job, health issues, disability or family emergencies.

“If it takes you longer to pay for the purchase than the ‘life span’ of the item, you can’t afford it.”

• You have a monthly balance on your credit cards. The general rule of thumb for credit purchases is: If it takes you longer to pay for the purchase than the “life span” of the item, you can’t afford it. In other words, if you pay for a one-week vacation on credit, and it takes you more than several months to pay for it, you are living beyond your means. Try to have enough money to pay off your credit cards monthly so you don’t pay any interest or extra fees.

• You only consider the monthly loan payment amount for buying a car or home. These two items are most likely the most expensive items you will purchase in your lifetime. It is important to look at the monthly loan amount for a house and car, but that doesn’t mean you can necessarily afford it. For a car, if you can’t afford to pay the monthly amount unless the loan is longer than three years and doesn’t result in you owning the car outright at the end of the loan, you generally can’t afford it, given the extra interest you will be paying. For a house, the mortgage payment may not reflect the insurance, taxes and extra costs associated with home ownership that could bust your budget. In addition, getting a 15-year mortgage may be higher monthly payment than a 30-year mortgage, but if you opt for a 4 percent, 15-year fixed mortgage on a $250,000 home loan over a comparable 30-year mortgage, you will be saving $97,020 in interest over the life of the loan! Also, you will own the house outright in half the time.

• You have exceeded your credit limit and/or rely on overdraft protection. If you have paid an overdraft fee the past year in order to maintain your lifestyle, then you are probably living beyond your means. Also, if you have exceeded your credit limit, it not only costs more in fees, it also will hurt your credit score. Part of your credit score is based on your debt-to-utilization ratio, which is the amount of debt you have compared to your credit limit. If your credit balances are high relative to your credit limit, your credit score is lowered and it tells lenders you are over your head.

Budgeting properly can help you to live within your means. Visit artofthinkingsmart.com for important tips on how to do so!