The 6 Warning Signs That You Might Be Living Above Your Means

What to look out for and what you can do about it now

According to Gartner, roughly half of Americans are spending more money every month than they’re making. At the same time, only 37 percent of Americans have enough in savings to cover a $500 emergency. And being strapped for cash isn’t necessarily a problem confined to low-income earners. GoBankingRates found that of those making $150,000 or more, nearly 30 percent had less than $1,000 saved. Taken together, these stats signal that a significant proportion of Americans are living beyond their means, risking going into debt when life inevitably happens, and forgoing the opportunity to build long-term wealth.

Right when I got out of college and started working my first real job, I began setting myself up to live a life that I couldn’t afford without even knowing it. Since I knew how much money I had coming in each month, had no problem paying my bills, and was even contributing a little to my 401(k), I assumed I was doing just fine. I even considered myself to be pretty good with money. But the slow leak of overspend on groceries, emotional spending, and other impulse purchases, left me in a pretty bad spot when I needed an emergency car repair and eventually decided to leave my job.

In other words, it wasn’t until my tenuous financial position was tested that I realized just how stretched thin my bank account had been for months. In hindsight, here are the 6 warning signs that I should’ve been on the lookout for as the first signs of financial trouble. If you check some or all of these boxes right now, don’t panic. Keep in mind that all of these, even Warning Sign #1, are 100% fixable and can be addressed almost immediately.

Warning Sign #1: You’re spending more than 30% of your gross income on housing

Housing is most people’s biggest expense by an impressive margin. Consequently, overspending in this category can have an outsized negative impact on your overall ability to live within your means, stay out of debt, and build wealth. While most apartments require tenants to make 30X rent in order to get approved, I don’t recommend assuming that you can afford your place simply because you got approved for it. Even today, approval criteria can vary widely and should be taken with a grain of salt. The same idea rings true for your mortgage if you own or are looking to buy a home.

Rather than relying on the approval criteria to tell you whether or not you can afford your place, use the 30 percent rule. To do this, multiply your gross monthly income by 30 percent. The number you get will be the absolute upper bound that you can afford for your rent or mortgage. For example, if you make $5,000 per month, the max rent or mortgage you can afford would be $1,500. And if you own a home, I recommend staying especially well below your upper bound to account for property tax, home repairs, insurance, and HOA fees. For an added layer of security, you can also apply the 30 percent rule using your after-tax income, or net pay. The after-tax approach works especially well in high-tax areas and large cities.

If downsizing, relocating, subleasing or adding a roommate is feasible to make housing eat up a smaller percentage of your income, I highly recommend doing so. My previous rent accounted for about 25% of my income, but I decided to downsize my space because I knew that I could do so rather comfortably. Since my old apartment had a rather funky layout to it, I was effectively paying for space every month that I wasn’t able to use. So when the time came for me to relocate for work, I restricted my search to much smaller apartments and was able to find one that costs hundreds less per month — even in a more expensive city. Housing now accounts for around 16% of my gross income and the surplus goes straight into savings.

Warning Sign #2: You’re using credit out of necessity

Credit cards are generally a much safer way to pay than debit cards or cash, and they are wonderful tools for building credit and earning a little cash back on the side. That said, putting bills on credit because you’re unable to cash flow them from your paycheck signals that either your bills are too high relative to your income, or you’re struggling to prioritize needs over wants. At the same time, relying on credit can gradually land you in a mountain of debt thanks to the high interest rates. Rather than using your next paycheck to play catch-up, aim to re-orient your spending so that each paycheck is used to get out in front of any upcoming financial obligations.

If your credit reliance stems from your recurring bills being too high relative to your monthly income, look to supplement your paycheck while bringing down as many of your recurring costs as possible. You may be able to cut your bills down significantly by reining in your grocery budget, swapping car insurance, and carpooling with coworkers. I’ve done all the above and personally saved over $300 a month. To supplement my income in the past, I’ve also walked dogs and cleaned houses. That said, I recommend starting with your recurring bills and reducing what you can. This is because side income can not only be unpredictable, but a singular focus on your income also only addresses half of the problem.

If your use of credit is a result of not having the funds available to pay your bills after going out to eat, making a few impulse purchases, and paying for a slew of subscription services throughout the month, try this two-step process. Set up a separate bank account and label it “bills.” Then, set up autopay for your recurring expenses to be drafted from this account. On pay day, transfer the amount you’ll need for your upcoming bills straight to that account. Then, any money left over in your checking account is yours to save and spend as you wish without the risk of forgetting to account for those bills that come due later in the month. I ended up doing this exact thing with my internet and utility bills and have since not missed a single payment.

Warning Sign #3: You’re driving a car that you cannot afford

Too many people assume that they can afford their cars so long as they can make the monthly payment on it. At my first job out of college, I had several coworkers who drove brand new BMWs. While we all made decent money, we certainly were not making BMW money. And when I found out that several of my colleagues had monthly car payments north of $800, I knew that they were blowing out their budgets just to keep their cars. And with more expensive cars also come higher maintenance costs, parts replacement costs, personal property taxes, insurance rates, and gas prices depending on the vehicle’s required fuel grade.

The bottom line is that the total cost of car ownership extends far beyond the monthly payment. A good rule of thumb for determining what car you can afford is to spend no more than 10% of your monthly take-home pay on the payment and less than 15–20% of your take-home pay on total car expenses which include the monthly payment, insurance, fuel, and maintenance.

Warning Sign #4: You can’t afford to save

If your retirement account has next to nothing in it or your overall savings rate is less than 5%, this is a major red flag that you’re living above your means. Ideally, you should be setting aside at least 20% of your income every month to save for short- to medium-term emergencies and invest for long-term wealth creation. Even if a 20% savings rate isn’t possible for you today, put as much away as you can before spending a dime on eating out, entertainment, and other wants. At any income level, some savings is better than nothing.

If your inability to save stems from your income barely covering your essential expenses, take on a side job to supplement your income and throw those paychecks directly into savings. At the same time, do whatever you can to bring down your recurring expenses such as moving to a cheaper apartment, adding a roommate, or using electricity during off-peak hours.

If you make enough to cover your bills and usually have some money left over to spend, try paying yourself first. In other words, automate your savings so that the money you should be putting into savings every month doesn’t linger in your checking account and tempt you to spend more than you should. If direct deposit is an option with your employer, see if you can deposit a portion of your paycheck directly into your savings and investment accounts. Otherwise, set up your automated transfers to take place right after your paycheck hits your checking account. While manual transfers are always an option when paying yourself first, I don’t recommend them when you’re trying to make consistent savings a habit. The reason for this is that manual transfers still require an element of willpower.

Another tip I swear by is to budget against my income less savings. I know this sounds cheesy, but pretending that the money I save every month never existed to begin with, has led me to get a lot more creative with the money I have to cover my expenses and spend on wants. In other words, by artificially lowering my income, I have a much greater sense of urgency to stretch my funds as far as possible. And doing so has given rise to the majority of the money-saving tricks I now swear by. As a result, I’ve found several hundred additional dollars a month to save without feeling deprived of what I love.

Warning Sign #5: You don’t have a budget or you don’t refer back to it

If you don’t know exactly how much money is coming in every month, how much is going out, and exactly where your money is going, you’re most likely underestimating your spending by a significant amount. Nearly two years ago now, when I first realized that my spending habits were becoming unsustainable and I was looking to leave my job, I sat down to write a preliminary budget. Putting my historical expenditures down on paper confirmed that I was stretching my finances dangerously thin — even when I thought I was mostly good with money.

While writing my budget down and determining what to cut freed up hundreds of dollars in additional savings and clued me into my overall financial situation, I quickly realized that just creating a budget is not enough. Rather than setting a budget every month and then forgetting all about it, aim to use your budget as a real-time tracking tool. In other words, update your budget after every transaction, or at least enter your new expenses once a week — including those associated with planned or recurring expenses. By doing this, I was able to increase my savings rate month over month, set smarter money goals going forward, beat my bad money habits, and stop stressing about my finances once and for all.

Warning Sign #6: You care too much what other people think

Call it keeping up with the Joneses, doing it for the ‘gram, or just wanting to fit in. These all allude to spending money in order to impress people whose opinions don’t matter. I spent hundreds if not thousands of dollars in college just to conform to the expensive leggings and oversized sweatshirt uniform of my classmates. Even then I didn’t understand the appeal of paying that much money to look like I just got out of bed. But in order to avoid getting the side eye for showing up to lectures in my signature jeans and blouse, I caved.

Not only would I have been much better off using that money to get my emergency fund started — greatly minimizing my post-grad money stress — but I also would have learned a valuable lesson by sticking to my guns and doing my own thing. It wasn’t until I had to leave a downright toxic job at a tech giant that I realized how much weight I’d given to the opinions of other people who at best couldn’t possibly know my situation like I did. While I finally learned this lesson in the context of my career, it is one that I’ve routinely applied to my finances ever since — and with great results.

Whenever I’m tempted to buy something and impressing other people emerges as a motivating factor in the purchase, I put the item down and walk away. And whenever I feel obligated to spend money while out just to keep up with my friends, I make a note of it in my budget. If I find that I’m doing this routinely with any one of my friends, I come up with a plan to reassert my financial boundaries. If he or she isn’t receptive to those boundaries or looks down upon my chosen lifestyle, I find other friends. Talking about money openly when I need to has not only kept lifestyle inflation in check, but it has also made my relationships much more meaningful.

Hi, I’m Rachel. I’m passionate about beauty, personal finance, and how the two often intermingle.

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