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Our society is a debt culture. Everyday we are encouraged to make purchases and live a lifestyle we can’t finance. It is all too easy to sign up for credit cards these days. However, we have to go against the norm in order to have true financial freedom.
According to MarketWatch half of American families are living paycheck to paycheck. This means that 50% of the population is unprepared for an emergency. Nearly 1 in 5 Americans have no savings for an emergency, while 1 in 3 don’t even have at least $500 in savings. (yikes!)
These are pretty scary statistics, especially given the fact that emergencies come up all of the time (at the most inconvenient moments). Just imagine that you are trying to juggle paying the bills every month, have a big birthday party coming up for one of your children, planning a vacation, and now you have to get new tires.
If you don’t have a savings account to cover all of these extra expenses, you may be tempted to do what a lot of people do- use a credit card (or worse- take out a payday loan or overdraft your account).
Did you know that right now the total revolving debt in the US is over $1 trillion! Revolving debt is a debt that can carry a balance from one month to the next, and is typically credit card debt.
Not surprising, over 41% of all households carry some kind of credit card debt, and unfortunately the households that have the lowest net worth ($0 net worth or even negative net worth) tend to hold the highest amount of credit card debt, which is over $10,000. The average American holds 52% more debt today than they did just a decade before. Source: ValuePenguin
Many people brag about their credit card rewards and say that they don’t pay any interest because they pay off their credit card each month. Well, according to the Federal Reserve less than half of all credit card users are actually paying their credit cards off each month. Thus, the credit card companies are winning!
According to the Federal Reserve, only 45% of U.S. cardholders pay their card balances in full monthly. Here’s a closer look at the card payment numbers:
- 45% always pay their card balance in full each month.
- 27% carry a balance most of the time.
- 21% carry a balance some of the time.
- 6% carried a balance just once in the past year.
It’s very tempting to keep swiping your credit card to cover small and big purchases, but ultimately you are sacrificing your long-term freedom and wealth-building ability. If you keep having to pay down your debt then you are unable to put your money into investments which could help you grow passive income.
FREE DOWNLOAD: DEBT SNOWBALL AND DEBT REPAYMENT WORKSHEETS
No one wants to be in debt but many people have accepted debt as “a normal part of life.”
Car loans, student loans, medical bills, vacations, furniture… so many things that cost a lot of money and instead of saving up (or having a savings account) to pay for these, most people turn to borrowing money.
It all happens too fast, next thing we know we are left wondering how did we get here?
Well every small decision we have made to use a credit card or loan has landed us in debt! Everytime we swipe that card we are in denial of our financial situation and ignoring the fact that we are living above our means.
So how exactly do you know if you are living beyond your means? How do you recognize the warning signs? Keep on reading..
8 warning signs & what you can do to fix them today!
You are in debt and don’t pay with cash for all of your purchases
Do you have a student loan? Do you have a balance on your credit card? Do you keep using a credit card or a loan to pay for small and large purchases?
A lot of people don’t consider their student loan “debt.” There are some programs that help you “ignore” your student loan- including the income-driven repayment plan.
Yes it sounds like a great option until you realize every payment you make on this plan goes towards interest and your principal balance does not go down at all! The interest only keeps growing at an exponential rate! This is a horrible plan to choose if you have student loans (please do not select this plan!) If you want more information on Student Loan Repayment plans go to the Federal Student Aid website.
Solution: If you are not paying in cash for things you want in life but are borrowing money then you are living beyond your means. I understand this feels like a huge obstacle to overcome, but it is really important to stop borrowing money if you want to get out of debt.
The next step is to build up a substantial savings account so that you are prepared when Murphy’s Law comes to visit you (everything that can go wrong will go wrong).
Your car costs half as much as your annual income
Cars. They can be a huge financial drain. I know. I literally wasted so much money in my 20’s on car problems. I personally decided to buy a brand new Toyota Camry 6 years ago and I honestly am so happy with my decision. I got 0% interest due to a promotion and also got a few additional discounts as well which made it worth it financially for me. 6 years later and the only major repairs I’ve done were the breaks (which my friend did for me!) & new tires.
I have wasted thousands of dollars on repairing vehicles in the past because I kept getting crappy cars in my 20’s. I know a lot of financial gurus recommend a cheap car while paying off debt, but I honestly don’t think it is worth it. However, if your car is a huge financial drain then you might want to consider selling it, getting a beater for a year or two so you can get out debt and then buying a more reasonably priced vehicle.
Solution: What I do believe is worth it is to get a car that is really affordable to repair in case something goes wrong with it, one that has low mileage and also is an affordable price. If you have to get a car loan be sure to get a loan that you can pay off in 3 years max (yes I paid my car off 3.5 years).
Also do everything you can to get the lowest price and the lowest interest payment. If you have to, fix your credit score while paying off the car and refinance for a lower interest rate. Under no circumstances should you finance a loan that will take you 5-6 years to pay off, and that costs half of what you make a year!
The car will only end up being a financial drain over time so be very wise (and not impulsive) when purchasing a vehicle. If anything, get a slightly used vehicle with a trusted brand. Do a lot of research ahead of time and know what your limits are before you talk to a car salesman.
And please do not buy a car every few years! Your goal should be to buy a car, pay it off as soon as possible, and keep it for at least 10 years!
You are not tracking your spending with a Budget
Budgets are so scary at first, but honestly they are vital for your financial well-being. The scary part is just spending and hoping you will have enough money to cover everything! A budget is a system and a tool that you use to tell your money where to go.
A budget not only tracks your fixed expenses (rent, car payment, cell phone bill, etc) but it is a way to limit your varied expenses (gas, groceries, spending money). Each week I have a spending limit for these categories so that I can stay on track and not overspend.
I know when I reached my limit for that week and then have to curtail my spending at that point. Not only do you need a monthly budget, I believe in a yearly budget as well. Create a budget for things like: car repairs, car registration, vacations, birthday gifts, children’s birthday parties.
Solution: You have to create a budget and get determined to stick to it. You will mess up at times, but each day you have an opportunity to make a new choice. Using a budget is the best way to identify where you can easily cut back on your spending. I like to review my budget and challenge myself on cutting back on my expenses. Awareness is the first step!
Related post: Budgeting for the beginner
You are going to fast food chains, restaurants and coffee shops multiple times per week
EATING OUT. IS. EXPENSIVE.
Anyway you slice it, when you go to pay for a meal or a coffee you are paying extremely high prices! I understand that it is convenient, I understand that it is easy, but please understand that it is draining your financial resources unnecessarily! A meal from a fast food restaurant is on average $10! Making a meal at home could cost about $2. It is just not worth it.
Solution: Plan ahead! Meal prep if you need to. I have meal prepped for years and it saves me money (and calories). Always make sure you have something at home to eat so that if you are tempted to eat out you can remind yourself that you have food at home.
You might want to invest in meal prep containers (they are not even that expensive) or even a crockpot in order to make your meals ahead of time. I’ve also heard that Instapots are amazing. I really need to get one. I advise that you invest in cooking equipment because it really will pay off over the long-term when you cook at home. Always carry snacks with you so you don’t get “hangry.” Also, please do not pay $5 for a coffee! Learn how to make your coffee at home (I promise you it is worth it and tastes delicious).
Related Post: How to save money everyday, make your coffee at home
Making only the minimum payments on your debt
Have you come to the conclusion that you will simply be in debt forever? I know how discouraging it can be when you are faced with thousands of dollars worth of debt. I know because I have paid off over $110,000 worth of debt. It was debilitating!
But you know what, use your circumstances to light a fire under you! Instead of accepting your fate and just paying the bare minimum. If you follow Dave Ramsey’s advice he says that you should get a “Dave Job.” The purpose of this is to make extra money so that you can pay off your debt as soon as possible.
Solution: I highly recommend finding ways to increase your income by working two jobs temporarily so that you can conquer your debt battle. It. is. Possible. Make paying off your debt a priority so that you can get past it and move on with living the life that you choose.
Just imagine the financial freedom and security you will feel once you are debt free.
Related post: Debt Snowball versus Debt Avalanche
6. Not having any money in a savings account
Do you have a savings account that you can tap into in case of emergencies? It is really important to have an investment account but having a savings account that you can access easily is crucial (and just for emergencies!) While you’re at it, make sure you are using a savings account with a high yield APY so that your money is actually working harder for you.
Emergencies happen all of the time, unexpected events happen at the worst times possible. These emergencies can either break you or just be a minor inconvenience, it all depends upon how well you plan in advance. A job loss, car repairs, medical bills, housing repairs; all of these can happen to any one of us at anytime unexpectedly.
Solution: Have at a minimum $500-$1,000 for an emergency fund while you are paying off your debt. Once your debt is paid off then put at least 3-6 months of savings aside for an emergency.
After you have your emergency fund in place then focus on paying off your mortgage early and building up your investment accounts. If you don’t have a mortgage then aim to save 20% of a down payment for a home (to avoid paying PMI insurance).
Let’s face it, life is expensive. In order to succeed financially, you have to have a solid plan in place.
Related post: 13 High Yield Savings Accounts
You let the fear of disappointing others dictate your decisions
Friends and family mean well when they invite us out to dinner or social events. They want to spend time with us in a fun way. Heck we want to have fun ourselves right?
The problem comes when we really can’t afford the dinner or event so we put the cost on our credit card to cover the expense. Doing this occasionally is really not a big deal, but when it is the weekly norm then we have a problem. Ideally we will have social activities planned in our budget so that we know for sure we can afford them.
Solution: I think a lot of people don’t want to disappoint their friends and family by declining the invitation. What we don’t realize is that most of the time our friends and family can’t afford it either! We have to be brave enough to be honest and say, I really want to spend time with you but can we do something a little more affordable? I’m really trying to focus on getting my car paid off right now (or sticking to my budget, or getting out of debt).
Most of the time the plans can be altered. If they can’t then just let them know you will have to sit this one out but hope you can get together again soon.
Related Post: 109 Free things to do on a no-spend weekend
Your credit score is below 600
Your credit score is a direct reflection on how you handle your financial responsibilities. If you are making your payments on time and don’t have too many revolving accounts open then your credit score should reflect this. However, if you are constantly late with your payments, or your accounts go into collections, then most likely you are living beyond your means.
Solution: Find out your credit score and start to repair it immediately. Do you know what your credit score is? You can sign up with Credit Karma for free in order to get 2 out of your 3 credit scores. This site will let you know what you can do to improve your score as well.
I think it is important to have a high credit score (740+) because if you need to get a car loan or mortgage loan then you will get a better interest rate which will save you thousands of dollars over time.
If you are being irresponsible then you will pay for it in higher interest rates because you are then considered a riskier borrower.
In conclusion, these are 8 signs that you are living beyond your means.
Do any of them apply to you? I know some of them applied to me in the past until I got serious with my debt payoff plan.
I think it is important to be aware of what is stopping us from reaching our goals to be debt free.
Once we are debt free then we have more control over our lives and can experience financial freedom. Not to mention we can sleep better at night! It’s not easy to get debt free, but it is so worth it!
What are your tips for getting debt free? Please share them in the comments below!
FREE DOWNLOAD: DEBT SNOWBALL AND DEBT REPAYMENT WORKSHEETS
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