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.
Copyright 2012, Roshawn Watson, Pharm.D., Ph.D. All Rights Reserved.