Most of us have lived beyond our means at some point. Some admit it, and others haven’t yet stopped to think about it, so they’ll probably fall into the same trap again before long.
Stephanie Taylor, a regular writer for outlets such as Mint Life and Business Insider, published a list of signs that we’re living beyond our financial reach. Today many people will recognize themselves in some of these signs, not as a symptom that they’re living beyond their means now, but as the consequence of having lived with excess.
Being aware of these signs can keep us from falling into the same trap again and again.
Before we begin: if you’re looking to learn about personal finance or gain some financial education, in another article I listed some of the best books on financial education and personal finance.
5 signs that you’re living beyond your means
1. You couldn’t last more than 6 months without any income from work
If you lose your job, get no benefits of any kind and don’t have enough money to last at least 6 months while you look for other income, that’s a clear sign of living beyond your means, and one of the mistakes we already listed among the 6 most common bad financial habits.
Not being able to last those 6 months is a sign that we haven’t saved. Everyone needs what we call an «emergency fund»: liquid money set aside, as the name suggests, for emergencies, unemployment and loss of income being among them.
2. You use credit to buy things whose useful life is shorter than the loan
To begin with, if you have to take out a loan to go on vacation, you’re already living beyond your means, because you’re doing something you can’t afford and you’ll still be paying for it long after the vacation is over. If you’re making payments for 2 years for a 15-day vacation, that’s a bad sign.
On the other hand, if you buy something on credit and its useful life is shorter than the repayment period, you’ve made a very poor investment. In other words, if you finance a laptop over 5 years and its useful life is 3 years, you’ve bought something in a way you can’t afford.
3. Being able to make the car payments doesn’t mean you can afford the car
A car is usually the second-largest loan we take out in our lives, surpassed only by a home. At the same time, a car is the worst investment we’ll ever make, because it’s an asset that loses value over time. Just driving it off the lot means that five minutes later a vehicle is already worth up to 10% less.
Some people pay €200 a month for their car, others €500 and others as much as €850, and the person paying €850 doesn’t always earn more than the one paying €200. The urge to show off financial status by buying a car means many people have a nice car but can’t afford to fill the tank.
Also, going back to the previous point, if you finance the car over 8 years and after 6 years you have to replace it or it starts needing costly repairs, you’ve bought beyond your means.
4. You’ve been overdrawn on your bank account in the last year
If in the last 12 months a bill or loan payment was charged to your account when you didn’t have enough money, and the account went into the red, that’s a sign that something isn’t right with your finances. If it happens too often, we should think like a company: a company that sees its overdrafts growing usually doesn’t take long to close its doors.
5. You’re in debt but pay for services you could do yourself
When we want to get out of debt, the first thing to do is cut expenses, save as much as possible and live below our means. Knowing how to do something and, out of sheer laziness, paying someone else for that work or service is living beyond your means.
(Read: 5 tips for improving your personal finances)
Do you recognize yourself in any of these signs?
Further reading
- Financial education for our children: the sooner the better
- Warren Buffett’s 10 keys to financial success
- The 5 best books on financial education
Featured image: 401(K) 2012, CC BY-SA 2.0, via Flickr.
