Entering the real world can be overwhelming and confusing, and it's easy to get behind on expenses if you're not planning properly. In this article, we’ll show you the warning signs that you're living above your means and what you can do about it!
1. You're living paycheck to paycheck
Spending all of your paycheck before the next one shows up is a dangerous game. If you're letting yourself blow all your available cash in a month, it might be time to rethink your spending habits. Your bills can spiral out of control quickly if you're not giving enough attention to your financial situation, and it's harder to get back on track once you've let yourself loose.
2. You don't have an emergency fund.
An emergency fund is crucial for your own security. You should always have enough extra cash to help with anything that could go wrong. You get into a car accident, your dog needs to go to the vet, you break your leg rollerblading, your car won't start, you need to go to the clinic for a bad cold, we could go on and on. None of these problems can be easily managed if you don't have any money saved up. An emergency fund is your first line of defense when any surprises come up. Life is unexpected - your money habits shouldn't be.
3. Your credit score is below 580.
Having a poor credit score is not only a warning sign that you're living above your means, it can also cause you major problems. You’ll experience more fees, high interest rates, and difficulty getting approved for loans, apartments, or even cell phone contracts. Don’t know your credit score? That’s a warning sign too. Check out our tips on dealing with credit as a new adult, the right way.
4. You're saving less than 5% of your income (or nothing at all).
Another important part of adulthood is putting some of your money away for the future. You should be taking a good chunk of your paycheck and putting it into a savings account or some other safe place where you can find it a few years down the road. How much you should save depends on how much you make, but somewhere around 10-20% of your paycheck is suggested. If you're saving less than 5%, or not saving anything at all, you might find yourself in some rough waters later on in life.
5. Housing costs are more than 30% of your paycheck.
One of the best things about being an adult is living in a place that you love and making it your own. Unfortunately, sometimes finding the perfect place requires too much money, which results in living above your means. You might have to lower your standards now to be able to afford something better in the future. Housing costs should not make up more than 30% of your paycheck each month. Remember you also need to pay for utilities and food, and none of that should have to be paid for with credit.
6. FOMO dictates your spending habits.
FOMO, or fear of missing out, is something we all struggle with. All of your friends are going to Mexico for a week; you obviously want to go with, but you don't have the cash. The best thing to do in this situation is stay home and start putting money away for the next trip. It's hard to not be part of the fun, but it's harder to dig yourself out of debt because you took too many vacations and went to too many concerts when you didn't have the money.
7. You only pay the minimum balance on your credit card.
Using your credit card is okay every now and then, but it should not be your main source of spending. If you use it too often, it will be just another bill to worry about at the end of the month. Paying just the minimum balance on your credit card is dangerous, the interest and additional spending will add up fast making it even more challenging to get your balance back to $0. Not paying your balance in full also suggests you're probably relying on your card too much, which is a clear sign you're living above your means.
8. You take out loans for the wrong reasons.
Getting loans to pay your housing or utility bills is a bad idea. Loans can be helpful in a lot of situations, but using them for things you should be able to pay for on your own means you're doing something wrong. It's okay (and can be very beneficial) to take out student loans, home loans or car loans, but you shouldn't need a loan to pay for rent or food.
Are you an over-spender? Here’s how to get back on track.
TIP No. 1: Follow a budget.
The easiest way to overcome your overspending is to budget. Knowing how much you make and how much you spend will help you cut out the unnecessary expenses. The 50-20-30 rule is a good practice to live by: this means putting 50% of your income toward necessities, 20% toward financial goals like saving and investing, and 30% toward the things you want. Budgeting is a simple way to get ahead of your bad spending habits before they take over your life.
TIP No. 2: Track your spending for one month.
Try tracking all of your purchases for a month. This will reveal where your money is really going, and you may be surprised by what you find. Seeing where your money is ending up will help you know what you need to cut back on. This will also give you a good starting point when creating your budget.
TIP No. 3: Stay home more.
Relaxing and having fun is important, but it can easily take over your income. Going to movies in theaters and eating out frequently are easy ways to drain your bank account. Instead of going out, consider staying at home more. Watch a movie at your place or host a game night. Try making a home cooked meal. Not only is this a big money saver, it's usually healthier and cooking can be a great way to relieve stress.
TIP No. 4: Shop less and shop better.
Living above your means often results from shopping a lot and spending too much. Cut down on those trips to the mall - use that willpower. Hold off on buying that dress or new shoes until you have sufficient funds to do so. Another way to help with overspending is to shop better, and better means cheaper. Go for the off-brand chips at the grocery store and skip out on some of the more expensive foods you may like to indulge in. Get hamburger instead of steak, water instead of soda, a Hershey's bar instead of fancy truffles. You can also find cheaper makeup, clothes, toilet paper, shampoo, anything you can think of, if you're willing.
TIP No. 5: Start saving and investing.
As we talked about earlier, it is important to save. Cut out the extra things you don't need and put that money in a piggy bank, or a real bank for that matter. Saving as much as you can now will undoubtedly pay off in the long run. It’s also time to start contributing to your 401(k) or IRA fund. The sooner you start investing, the quicker your money can grow.
TIP No. 6: Don't abuse credit cards.
It’s important you treat your credit card like a debit card, in that you should only spend what you have in the bank. The benefit of having a credit card is to improve your credit score, and the best way to do that is by paying it off each month. By overusing your credit card, you hurt yourself in more ways than one. You increase your risk of debt, essentially pay more for the things you’re buying and can severely damage your credit score. If you’re unable to pay the full balance, stop using it until you can pay it off.
TIP No. 7: Pay off smaller debts first.
Another way you can help yourself from living above your means is by paying off your debt. A good practice is to start with your smaller debts and work your way up. Tackling those big loans first can be overwhelming. Instead, take a look at what you have to pay and focus on the little stuff first. Start by composing a list of your debts, then begin by making all the minimum payments. After you've done that, pay as much as you can on your smallest debt, and continue up the scale. This will help make the process seem a little less scary.
TIP No. 8: Consolidate your debt.
Consider consolidating your debt to roll everything into one payment. This helps to reorganize it so you can potentially pay everything off sooner. One of the most common types is student loan consolidation. The iHELP refinance loan is designed to simplify payments and make your life easier. We offer personal service, flexible repayment options and competitive fixed or variable rates.
It's not difficult to get caught up in the shenanigans of adult life, but these expenses can hurt you in the long run. Remember to be smart with your money - once you spend it, you can't get it back.