Whether you consider yourself to be financially responsible, or you always seem to come up short on cash, there are a few key indicators that may indicate you are living beyond your means—and being aware of them can save you loads of money woes in times of a cash emergency.
You couldn’t live without your job’s income for at least six months.
Need some motivation to start saving? Sit down and add up how much money you make each month. Then, multiply that amount by six.
Assuming you have a stable job, that’s the minimum balance you should have stashed away in an interest bearing, FDIC insured deposit account that is earmarked solely for emergency needs, according to Henk Peters, Certified Financial Planner and president of Investus Financial Planning.
“Clients frequently underestimate life’s uncertainties and discount the need to have cash available for unexpected events like unemployment, illness, disabilities, and family emergencies,” he says.
If you have a less-than-stable career or you’re self-employed, he recommends saving as much as 12 months worth of income. If you don’t have anything near that amount saved, and worse, you’re in debt, you’re living beyond your means.
You vacation on credit.
You work hard and you’ve earned that vacation, right? Consider this financial rule of thumb when it comes to credit purchases: If it takes you longer to pay for the purchase than the actual “life span” of the item, you can’t really afford it.
Start a plan to save money for vacations well in advance of the time you’ll need to book tickets or make reservations—even if you intend to charge your trip for purchase protection reasons.
Make sure you pay the balance down before you’re charged a dime of interest and be realistic about all the “extras” that can add to the cost of a trip, like tips, parking, and baggage fees.
You only consider monthly payments when buying a car.
Aside from a home, a car is one of the most expensive items you’ll purchase in your life. While it’s understandable to focus on monthly payment amounts when determining how much car you can buy, your ability to afford a monthly auto loan payment doesn’t mean you can afford the car.
If you’re in doubt, consider the duration of the loan: If it’s longer than three years, and doesn’t result in owning the vehicle outright at the conclusion of the loan, you’re shopping out of your true budget.
The same premise holds true for auto loan refinancing: If you’re refinancing because interest rates have dropped considerably since you initiated the loan, that may be a money-smart move.
If you are refinancing only to lower your monthly payments, and refinancing means that you are extending the life of the loan, you’re not actually saving money — you’re just stretching out the payments.
You’ve arrived at the home you can afford based on a 30-year fixed mortgage.
If you’ve calculated the amount of home you can afford based only a 30-year fixed mortgage scenario, you may be taking on more than you can really afford.
Instead of strapping yourself to a 30-year fixed mortgage payment, consider how much more affordable less house with a shorter loan term is—despite the higher monthly payment.
By opting for a four percent, 15-year fixed mortgage on a $250,000 home loan over a comparable 30-year fixed loan, a homeowner could save $97,020 in interest over the life of the loan. Further, he owns the home in less than two decades.
You’ve paid an overdraft fee in the last 12 months.
If money is so tight that you have to rely on overdraft protection in order to float your lifestyle, you’re living beyond what you can afford. Period.
You’ve exceeded your credit limit.
Exceeding your credit limit doesn’t just cost you in over-limit fees.
Because your credit score is based largely on your debt-to-utilization ratio, which is the difference of the amount of available credit you have to what you’ve used, your credit score is lowered when your credit balances are high and it signals to lenders that you’re in over your head.
If you are approved for new lines of credit—including a home mortgage—your future interest rates will be sky high.
You’re in debt but you pay someone to do a job you could do yourself.
Are you too busy to clean your house, walk your dog, mow your lawn, or manicure your nails?
While some expenses, like childcare and vehicle maintenance are unavoidable, a person who is in debt can’t afford frivolous luxuries that (while unpleasant) could technically be handled “in house.”
Instead of paying someone else for skills you possess, do the task yourself and put the savings toward paying down debt, building your emergency savings accounts and funding your retirement.
Stephanie Taylor Christensen is a former financial services marketer based in Columbus, OH. The founder of Wellness On Less, she also writes on small business, consumer interest, wellness, career and personal finance topics.