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Back when we mostly used cash to make purchases, it was harder to live beyond our means. Once we used up what was in our wallets, our spending power was gone. With the advent of credit cards and easily accessible loans, plus the ubiquity of online shopping, it's easy to click "buy now" without thinking through whether we can really afford it.
These tools can be useful in emergencies, and financial products like credit cards have the potential to help you build credit or earn rewards. But when you're living beyond your means, you may be overspending and racking up debt, making it hard to achieve good financial health. Here's how to know if you're in trouble and how to stop living beyond your means.
Warning Signs You're Living Beyond Your Means
If you recognize these signs in your household, you might be spending more than you're bringing in.
1. You Exceed Your Budget
When you create a budget, you track how much money you're earning and spending each month. You list your ongoing bills and expenses and determine how much you can afford to put toward each category. Done properly, this process helps make sure you live within your means. If you regularly exceed your budget and spend more than what's coming in—either for some spending categories or all of them—that's a clear sign that you're living beyond your means.
2. You Only Make Minimum Payments on Debt
When you have credit card debt, you're only required to make a minimum payment to keep your account in good standing. But paying only the minimum rarely makes a meaningful dent in your account balance, leaving your debt to grow due to interest charges.
Making only minimum payments is more affordable in the short term, but it can trap you in a cycle of debt in the long term and hurt your credit score. It's always advisable to pay more than the minimum—and ideal to not carry a balance at all. If you can't afford to pay more than your minimum payment, you're likely spending more than you can afford.
3. You Live Paycheck to Paycheck
Part of being financially healthy means being able to set aside some money each month for savings goals and still have a cushion for unexpected expenses. Unfortunately, it's common to live paycheck to paycheck, where money runs out or barely sustains you until your next payday. If you find yourself stretched too thin between paychecks, it's a sign you're living beyond your means.
4. You Regularly Put Purchases on Credit
Financial tools such as credit cards, loans and lines of credit can be very useful—but they can be tempting and dangerous if you wind up relying on them. Some consumers put daily purchases on credit cards to rack up rewards points, which is no problem if you pay your bill in full each month. But regularly financing purchases you can't afford to pay otherwise can be a red flag. Before you use credit for any purchase, make sure you have a plan to pay it off.
5. You've Accumulated More Debt Than You Can Afford to Pay Off
Debt can help you pay for purchases you can't afford outright. After all, it's typical to take on debt to buy a home or car since few people can pay for such a large purchase in cash.
But if you frequently use credit cards for day-to-day purchases, or you finance purchases instead of paying for them upfront, you might find yourself buried under a mountain of debt. Having significant credit card debt can feel even more overwhelming if you also have other forms of debt such as car loans, student loans or a mortgage. Most debts require monthly payments, and having many debt obligations means a chunk of your income goes toward them before you can use them on other bills and spending.
6. You Don't Save Money
Another consequence of living beyond your means can be that you don't have enough money to set aside savings. It's critical to have a savings buffer as an emergency fund, and it's helpful to have short-term savings for goals such as education, a vacation or a down payment on a home to avoid taking on too much debt. It's also important to save for retirement as early as possible so you're not forced to work or take on more debt when you're elderly. If you can't afford to set aside any savings, your financial health needs work.
How to Stop Living Beyond Your Means
If you recognize any of these signs, don't beat yourself up; instead, learn from your mistakes and make a plan to adjust. Here's how to stop living beyond your means:
- Look for patterns. Check your budget and your debit and credit card statements to see if you're spending more than you realize, especially in specific categories. For example, you may notice you're exceeding your budget for food by frequently eating out or having food delivered. By examining where you're overspending, you can make a plan to cut back. In this example, it could be time to focus on doing more grocery shopping and cooking, and only going to restaurants on weekends.
- Create a budget and stick with it. One of the best ways to tackle living beyond your means is to develop a budget and stick with it as closely as possible. This helps ensure you can cover essential expenses without spending more than you make and that you have enough left over for savings. It can also help you identify disposable income that can be diverted toward savings or paying down debt. For newbies, using a budgeting app can make the process even easier.
- Don't put things on credit. If you're living beyond your means because you find it all too easy to put purchases on credit, commit to only buying things you have enough cash to cover. This could mean only using a debit card rather than a credit card. It could also mean shopping in person with cash only, so when you run out, you know you've hit your limit. If you tend to be an online impulse shopper, try removing your stored credit card information from your go-to stores to reduce temptation.
- Find more income. Sometimes, cutting back on expenses isn't enough to get ahead on debt and bills. In this case, it may be time to look for additional sources of income, even temporarily. Getting a side hustle or finding a part-time job can help bring in extra income that makes it easier to live within your means and avoid taking on new debt.
- Build up savings. Once you've created a budget and stabilized debt, it's smart to prioritize savings. If you don't yet have an emergency fund, now is a great time to build one so you don't have to go into debt if you encounter large unexpected expenses. Once you have a few months of living expenses saved, you may want to focus on saving for other goals like a down payment on a home, a child's college fund or your retirement.
Consider the Impact on Your Credit
Living beyond your means doesn't just lead to debt and lack of savings, it can also damage your credit score. That's largely because credit bureaus and lenders consider it risky when someone has a high credit utilization ratio, meaning they're using a large amount of their available credit. If your debt spirals out of control, you may also make late payments or miss payments, and potentially even default—all of which harm credit scores.
To ensure your spending habits aren't impacting your credit, check your report score for free with Experian. Viewing your report can also show you where there's room for improvement, and over time, you can see how improving your overall financial health also benefits your credit.