This week we have an eye-opening guest post from personal finance blogger Cara Palmer.
Living beyond your means – that is, spending more than you earn – can be the cause of huge financial issues further down the line. If you recognize any of these symptoms in your own lifestyle, consider this your wake-up call!
Americans are notorious for living beyond their means. A desire to keep up with the Joneses combined with the inability to resist the latest shiny sports car or dream home has landed many Americans in an uncomfortable financial position. Nearly 80% of Americans are living paycheck to paycheck and 71% are carrying debt.
Perhaps the most surprising statistic is that many of these individuals earn 100K more per year, illustrating the harsh reality that people are overspending.
Below are five signs that you’re living beyond your means, and what you can do to regain your financial security.
1) You are falling behind on payments for your snazzy new car
“People are underwater on their loans, and as a result, defaulting at higher rates. According to the New York Fed, 6 million people are 90 days behind on their auto loan payments. In all, there is $1.135 trillion in outstanding auto loans out there — roughly on par with the $1.3 trillion in student loan debt.”
– Sam Becker, Money and Career CheatSheet
More car owners than ever are falling behind on their car payments.
For years, Americans have carried on a love affair with their cars, stretching their budgets to afford cars with the latest cutting-edge features. Unfortunately, many vehicle owners find themselves struggling to maintain their status as a vehicle owner. In addition to difficulty making payments, many car or truck owners experience the following:
- Difficulty paying for insurance premiums or vehicle registration fees
- Inability to pay for repairs or maintenance costs
- Trouble coming up with money to pay for gas and oil
2) You just took a posh vacation even though your savings account is empty
62% of Americans take vacations each year, many of which are too costly out-of-state or overseas locations.
Shockingly, nearly two-thirds of Americans have little or nothing saved in a savings or retirement account, which means that many Americans are going into debt or using every cent they earn to finance their vacations.
When all of your earnings are devoted to house payments, car payments, and leisure activities like vacations, it becomes virtually impossible to save any money for emergencies. With 65% of Americans having little or nothing saved in a savings account or retirement account, the path to retirement will be an uphill battle for many people unless they stop spending beyond their means.
3) Your beautiful new home has no furniture
“Some people become house poor when their income plummets and they stay in an expensive mortgage payment. Others create the problem by buying too much house to begin with. Whatever the cause, the financial consequences of being house poor are dire and often include creeping credit card debt and an inability to save enough for retirement.”
–Amber Gilstrap, CPA, Money Under 30
The number of people who are “house poor” is growing every day. Many are living beyond their means because they purchase a home that is out of their price range. Financial gurus advise that your house payment should be roughly 25% to 30% of your take-home pay depending upon the existence of other outstanding debts.
Unfortunately, many homeowners live in homes with monthly payments that require up to 60% or more of their take-home pay. This often creates a struggle to afford payments and can make it even more difficult to purchase furniture.
The end result is often a dream home that is devoid of furnishings.
4) You make a decent salary but postpone medical care
Roughly one in four Americans find themselves in situations where they refuse medical care because they are unable to afford it. While many of these individuals are not necessarily overspending, there are many Americans whose penchant for the latest sports car or smartphone ends up affecting their ability to pay for medical care.
According to the Federal Reserve Board’s Report on the Economic Well-Being of U.S. Households, 44% of American adults say they would be unable to come up with $400 to pay for an emergency without depending on help from family, friends, credit cards, or the sale of personal belongings. This figure includes people who have healthy salaries, but who carry so much debt that they are unable to cover the costs of an emergency.
5) You have an interest-only mortgage loan
“Interest-only loans, which require borrowers to pay only the interest on the loan for an initial fixed period, shouldered much of the blame for the flood of foreclosures when the housing bubble burst. Lenders approved loans for borrowers who could handle only the interest payments – but many later lost their homes when the full, unaffordable mortgage payment came due.”
– Michele Lerner, U.S. News & World Report
Approximately 1% of all mortgages issued are interest-only loans. This means that a homeowner only pays the interest on a loan and the full payment is due later.
While 1% of homeowners may seem like a small figure, it is important to remember that there are over 126 million homeowners in the United States. This means that there are over 1.2 million people who are only paying the interest on their mortgage every month.
What are the best steps to take if you are living beyond your means?
If you fall into one or more of the categories above, you are likely living beyond your means. The best step you can take if you find yourself in this position is take our money saving challenge to help get yourself back on the path to a more financially secure lifestyle.
In addition to taking matters into your own hands, you can also seek the guidance of an expert. A seasoned expert can help you discover additional income streams and pull yourself out of debt.
About The Author: Cara Palmer paid off over $20k of debt and then started buying rental properties with her husband, Daron. They own six rental properties, and Cara writes about real estate and making and saving money over at CaraPalmer.com.
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