If you are worried that you're living beyond your means, there's a good chance you're right. Here are five signs that you're headed for trouble and need to make a course correction now.
- When you see signs that you are living beyond your means, take action to change your lifestyle.
- Break the cycle of revolving credit, keep better track of how much you owe and keep an eye on your credit report.
- Take a hard look at monthly expenses, and make sure you're not paying too big a percentage of your paycheck toward your rent or mortgage.
- Get into the habit of saving. Even setting aside 5% of your income can make a big difference over time.
- Consistently pay down your credit card balance or risk owing thousands more than what you paid initially.
1. Your Credit Score Is Below 600
Your credit report is a running record of your routine payment history and outstanding loan balances. The credit bureaus use this information to compile your credit score, which is a numerical representation of a person's creditworthiness. Your credit score can be obtained by anyone considering giving you new credit and, for that matter, anyone you do business with of any kind.
The three major credit bureaus differ a little, but credit scores generally range from a low of 300 to 850. A score of around 670 or above is considered good. A score above 800 is excellent.
If your score is 579 or below, it's below the average and below the level that will make it easy for you to obtain additional credit at a reasonable rate of interest.
Granted, it's not in your best interest to get further into debt. However, if your car dies tomorrow and you need it to get to work, your options will be limited.
If you don't have a cash cushion or access to credit, any unexpected expense is a source of great stress.
If you aren't sure what your credit score is, you can get a free copy of your reports from all three credit bureaus once a year at annualcreditreport.com. This is the site that is authorized by the Federal Trade Commission. Don't get tricked into paying for your report elsewhere.
2. You Are Saving Less Than 5%
If you are saving less than 5% of your gross income, you're probably in over your head. If you're spending more than you earn, you're definitely in over your head. (There's even a term for that: dissavings.)
A lack of savings leaves you in constant danger that an emergency, job loss, or health problem will disrupt your life or hurt your family, or both.
You're not alone. The savings rates of Americans have been falling steadily since 1975, when Americans saved as much as 17% of their disposable income, according to the Federal Reserve Bank of St. Louis, which tracks the numbers. The trend bottomed out in mid-2005 at a measly 2.2%, and by January 2020, ahead of the start of the COVID-19 pandemic, hovered at just under 8%.
That's not exactly Scrooge-like frugality, but it's respectable. If you haven't jumped on the saving bandwagon, now's the time to do it.
*Shaded area denotes U.S. recession
A savings target rule that many financial advisors suggest is 10% of your gross income. Beginning at age 30, if you were to save 10% of your $100,000 annual income in your 401(k), or $10,000 every year, and earn an annual rate of return of 5%, that money would grow to more than $900,000 by age 65.
Please note that there is an annual contribution limit for a 401(k) per the Internal Revenue Service (IRS) For 2022, the annual contribution limit is $20,500 and for 2023, the limit is $22,500 for 401(k) plans. For those aged 50 and older, you can contribute an additional $6,500 in 2022 ($7,500 in 2023)—called a catch-up contribution.
The annual contribution limit for traditional individual retirement accounts (IRAs) and Roth IRAs is $6,000 for 2022, and $6,500 for 2023. For those aged 50 and older, a catch-up contribution of $1,000 is allowed for each year.
3. Your Credit Card Balances Are Rising
If you pay only the minimum due on your credit card balances each month or if you send in only a small contribution toward the principal balance, you are very likely in over your head.
The average annual interest rate on all credit cards was 16.27% in the third quarter of 2022, and the average on existing balances was 18.43%. It's easy to get sucked into an endless cycle of revolving debt.
Ideally, you should only charge what you can pay off at the end of each month. If you can't pay it off in full, make at least some contribution toward the outstanding principal. Also, it's best to stop using credit cards until the balances are under control.
The importance of paying down credit card balances cannot be overstated. A person with $5,000 in credit card debt that makes the minimum payment of just $200 per month will end up spending more than $6,000 and take more than two and a half years to pay off that debt.
4. More Than 28% of Your Income Goes to Housing
Calculate what percentage of your monthly income goes toward your mortgage, property taxes, and insurance or, alternately, your rent. If it's more than 28% of your gross income, then you are probably in over your head.
Why is 28% the magic number? Historically, conservative lenders have used this threshold because experience has taught them that it is the amount that the average person can pay and still enjoy a reasonable standard of living. (Lending standards loosened considerably for a time. Then the 2008 subprime mortgage meltdown happened.)
Certainly, some get by spending a higher percentage on their homes and cutting back elsewhere, but it's a dangerous line to walk.
5. Your Bills Are Spiraling Out of Control
Buying on credit and paying by installment has become a national pastime. As of the third quarter of 2022, consumer debt in the U.S. was $16.51 trillion.
It's much easier to buy a new flat-screen TV when the salesman breaks down the price in monthly installments. What's an extra $50 per month, right?
If your monthly income is being sliced and diced to pay for dozens of unnecessary installment purchases and services, you are likely in over your head.
It's not just credit card debt; it's other monthly installment debts as well. Get out all of your monthly bills and go through them one by one. Do you need a premium cable package, or can you make do with Netflix or Amazon Prime plus wi-fi? Are you running the air-conditioner when it isn't essential? Shut it off and tell yourself you're saving the environment.
Some of the best places to find monthly savings include your phone bill, utilities, and entertainment expenses.
If you see your own situation in some of all of the above signs of financial trouble, take it as a call to action. Measure your financial health regularly. Reassess your day-to-day spending habits. Concentrate on paying down your debts. Peace of mind and greater prosperity will follow.