Five Signs that You're Living Beyond Your Means

As most of you know, I love to tell people that spending less than they earn is the key to financial success. Much of this blog is about that -- and how to get to the point where you have more and more surplus coming in to your finances.

That's why I like this Yahoo piece that lists five signs that you're living beyond your means. It serves as a good guide to keep us all aware of money moves that could derail our finances. Here are their thoughts along with some comments from me:

Sign No. 1 - Your Credit Score is Below 600

Not an issue for me, but having a good credit score is certainly a key part of good finances.

Sign No. 2 - You are Saving Less Than 5%

I currently save about 20% of my salary, though many FMF readers save much more. Good for you.

Sign No. 3 - Your Credit Card Balances are Rising

I'd change this to "you have credit card balances." Carrying any balance on a credit card is a BIG sign that you're spending more than you earn.

Sign No. 4 - More Than 28% of Income Goes To Your House

Taxes and maintenance are the only things I pay on our home since we haven't had a mortgage in over a decade. If we buy a new place, the longest we should have a mortgage is a couple years. But if we don't buy something this summer, it's likely we'll be able to pay cash for the new place outright as we'll have a few more months of saving ahead of us.

Sign No. 5 - Your Bills are Spiraling Out of Control

Uh, yeah. Of course.

So, how can you spend less than you earn (or widen the gap if you already are doing so)? Only two ways -- spend less or earn more.

Comments

[cmadler]

Your comment on #3 is wrong. Carrying a balance on a credit card means that you WERE spending more than you earned. If the balance is declining (you are gradually paying it down), that means that you are now spending less than you are earning.

[Seanian]

Sign #1 is very misleading. You see, a FICO credit score measures only your activity of borrowed money. It does not measure your spending or saving habits, and it certainly cannot tell you if you're living beyond your means.

Individuals who do not borrow money long enough will have a zero credit score. That doesn't mean they are living beyond their means. In fact, chances are they are living well below their means because the moment you borrow money you are confirming that you didn't have the cash in hand to purchase whatever it is you're borrowing the money for!

Don't be fooled into thinking FICO provides a clear snapshot of your financial health. All it measures is how actively you spend money that isn't yours.

[Kim]

When they say 28% of income, is that gross or net? By the time I take my 401(k) contributions out and tax, it's a big difference!

[Seanian]

The 28% refers to net (take-home) pay, and it's actually a little high. You really shouldn't spend more than 1/4 (25%) of your take home pay on housing. If you're creeping up to 1/3 of your take home going towards housing, you have too much house for your income.

[AL]

I always heard that the 28% was based on gross pay, not net. In NYC, I spend 27% of my gross pay on rent, which is 44% of my net pay. (And I even have a roommate!) Of course, I don't have car costs--loans, insurance, gasoline, etc.--which means I have more take-home money available for housing that someone might who is paying 44% net somewhere else, with car payments on top of that.

But I think paying only 25% of your net for housing sounds a little extreme. Then again, maybe I'm just used to NYC prices.

[Kevin]

I agree w/AL, I've always heard 28% of gross income as well.

[Spoodles]

Sign No. 1 - Your Credit Score is Below 600

Bwahahahahaha! That's hilarious. My credit score is below 600, and it's *because* I've lived within my means. The only thing on my credit report is a hospital bill from 6 years ago that I didn't even know about until <4 months ago. For some reason, I was never contacted. Probably a wrong address, but I'm not calling to find out. Way too late to clear up the misunderstanding or pay it off without hurting myself, since it drops off my report in October as long as I don't remind them I exist.

The reason my credit score is so low is because I've never used credit. At all. Now, I'm gonna have to remedy this soon, as we're buying a house (hopefully) late next year, and I'll need more time than I actually have to get a great score. I'll take a hit on that, but it's not because I've been irresponsible or living beyond my means. It's because of a set of (partly) bad assumptions that the entire credit industry is built upon. Hopefully, the downpayment amount will be enough to offset the sad little credit score. My husband's score is great, so that will help a little. I'll be starting some much-needed credit-building next week, since I kinda have to. Still, your credit score doesn't necessarily say whether you've lived within your means...only that you've been able to live within a set of guidelines that the credit industry likes. I'm not complaining. It's the best method available for companies who have no idea who I am to evaluate my trust-worthiness. If I had a rich uncle, I'd go ask him instead. ;-)

[MonkeyMonk]

As is common with these types of lists, they are full of generalization and don't really focus on any of the specifics that can cause any of them to be off. They're fun to use as a guide but I wouldn't get too concerned if you're failing in any one or two areas.

Personally my family is wildly over on #4 (we live in an expensive city and really fell in love with our place) but we're doing great on all of the other 4 signs. The mere fact that we were able to save over 30% of our income last year leads me to believe that were doing just fine.

[mrm]

I think #4 should read "Your mortgage is more than X% of your income."...we put more than 28% toward our mortgage every month because we're paying it off early and are shoveling money at it. Putting 28% of your income toward your house isn't a bad thing. It's how big the loan is that's the problem.

[MrAtoZ]

To settle the gross vs. net quandary, the article itself says it is in fact gross (total) monthly income: "If it's more than 28% of your gross income, then you are likely in over your head."

[Pat]

I have to agree that #4 isn't always a good measurement of being in over your head. I live in Southern California. I just bought my first home which I was lucky enough to even get due to the collapse of the housing market. I pay 37% of my gross monthly income in mortgage and escrow account payments. And like Al above, I do not have to worry about gasoline prices (everything I need is in walking distance including work). I also manage to save 26% of my annual income, my FICO score is 813 (I suspect that is because I use a Chase rewards card to buy groceries and incidentals which I pay off every month) and I have no debt other than the house. Plus, I am on target to retire early at 57, sell the house and move back to the Midwest where my family lives. I wouldn’t consider myself to be living beyond my means by a long shot. You have to look at the big picture, not just one piece.

[grumpy]

My credit score is below 600, I am saving 0% of my income, and more than 50% of my income pays the rent. What's the solution?

[Mauricio]

FMF,

Does buying your new house w/ cash include the money from selling your current home?

I always wondered how that act is juggled. If you wait to move into your new home before selling your old home, do you carry a mortgage for a few months? If so, will paying it off quickly violate some terms with the bank? Or is the buying+selling just commonly brought as close together as possible?

[FMF]

Grumpy -

Sounds like you need to get to a point where you can save some money (earn more or spend less or both). It seems like this will solve many of your problems.

Mauricio --

That's a good question -- worthy of a post. I'll cover it in a couple weeks, so stay tuned.