While there’s nothing wrong with treating yourself and making lifestyle upgrades, it can be a fine balance between reasonable and a lifestyle that you cannot afford. Read on to see if you are living above your means.
Living beyond your means essentially means you are living a lifestyle you are unable to afford. This usually refers to discretionary spending such as money spent on holidays, clothes, cars rather than on things you need such as education, bills and rent.
So, how do you actually know if you are living beyond your means?
Read on to find out.
1. You are not prepared for financial emergencies
If you were slapped with a $2,000 emergency that needed to be paid ASAP, how would you deal with this? Could you pay it off in cash or would you have to stick it on a credit card?
If you don’t, it’s likely that you haven’t prioritised creating an emergency fund. This is an indicator that you may be living beyond your means.
An emergency fund is a pool of money set aside to cover any unexpected financial costs that you may encounter.
This is one of the most powerful financial tools that you can create for yourself. Having an emergency fund can ensure that you are putting your financial future first.
2. You are not saving any of your income
If you’re not making a large income or have high expenses, it can be very challenging to save even a small amount of money.
However, it could also mean that you are simply spending more than you can afford and living beyond your means. For example, you may believe that your $100/month gym membership is a necessary cost.
If you are unable to save any money at all at the end of month, it is likely that you cannot actually afford that membership and are living beyond your means.
Remember – just because you physically have the money doesn’t mean you can necessarily afford something.
3. You have to go into debt to pay for large purchases
Have you ever put costs for a holiday on your credit card because you didn’t have money at that time? Or, had to borrow money from family to buy a designer bag?
If you have to go into debt for a large purchase that you don’t need, it is likely that you are living beyond your means and that you can’t actually afford it.
Of course, this doesn’t apply to debt such as house mortgages or even car loans but rather discretionary expenses that are not a necessity. It’s a matter of asking yourself “Can I really live without this purchase? Is it truly worth getting into debt over?”
At the end of the day, no matter how much money you make – if you are overspending, you cannot build wealth.
Similarly, just because you make a low or average income (like myself!) doesn’t mean you just give up and spend all your money.
Your money habits can be a much more powerful thing than your income itself.