If you don’t watch your daily spending, it’s easy to overspend. And if you overspend regularly, you could find yourself short of money at the end of the month, which could mean running up debt or leaving bills unpaid. Even if you have enough money each month, are you saving any money for an emergency? If you are continually short of money, then it’s time for some serious budgeting.
If you are living beyond your means, you are not alone. Seventy-eight percent of Americans are living paycheck to paycheck. Even if you aren’t living on the edge, the average American is saving less than 5 percent of their income, which means they aren’t living within their means. Ideally, you should be saving at least 20 percent of your income for emergencies and retirement.
If you find yourself consistently overspending, then you may have to adjust your spending and saving habits.
Telltale Signs That You Are Overspending
Here are some telltale signs that you may be living beyond your means:
1. Your credit card balances keep rising.
Credit cards use revolving credit, which means that finance charges are added to the total outstanding balance each month. Even if you make your minimum monthly payments, your credit card balance will continue to increase because of credit card interest. Consider strategies to tackle credit card debt and pay down the balance.
2. Your credit score that continues to drop.
Your credit score is a way lenders assess your creditworthiness and whether they should let you borrow money. It’s based on a variety of factors, including the length of your credit history, whether you pay your bills on time, and your debt-to-income ratio. You want your credit score to be 600 or higher. Your score could fall below 600 for any number of reasons, but one of the biggest factors is carrying too much debt.
3. You are paying more than 30 percent of your income for housing.
It doesn’t matter whether you rent or own your home; if you are paying more than a third of your income on housing, you’re paying too much. Thirty percent of your income for housing is a metric that was set by the government in 1981. If you are spending more than 30 percent, you are considered cost burdened. If you own your home and are paying more than 30 percent, you are house poor, which means your other financial commitments are at risk. Worse still, if you bought a home during the housing boom and it has dropped in price, you may find yourself with an upside-down mortgage where you owe more than the house is worth.
4. You vacation on credit.
We all love to travel, but if you are borrowing money to take a vacation, either you are overspending on your trip or you aren’t saving enough for your vacation—or both. You should be able to pay for your trip from your savings. Using a “play now, pay later” strategy will only increase the amount of debt you have to carry.
5. You don’t have an emergency fund.
Every financial expert will tell you that you should have at least three months of income set aside as an emergency fund. If you lose your job or become sick and can’t work, you want to have enough saved so that you can pay your bills. You also want to be prepared for everyday emergencies, such as car repairs or medical bills.
6. You plan your spending using “potential” income.
If you are planning your spending around money that might come in, then you are living on wishful thinking. Whether you are expecting a raise or waiting for someone to pay you what you are owed, you can’t spend the money until you actually receive it.
Use Financial Planning to Manage Spending
The best way to deal with overspending is careful budgeting. Take a hard look at your income and expenses and make some firm decisions about what you can really afford.
When budgeting, start by listing your monthly income and your monthly expenses. List your fixed costs, such as housing and loan payments, and estimate variable costs, such as electricity, food, and transportation. Also, be sure to include nonessential expenses, such as dining out, movies, and so on. When you add up the income and expenses, you want to have at least 5 percent of your income available for savings, if not more. If you don’t have enough for savings, revisit your variable and nonessential costs and find ways to cut your expenses. For example, how much would you save each month by eating at home rather than eating out?
If you can’t balance your budget because you are carrying a lot of debt, you might consider debt consolidation. If you can qualify for a loan at a lower interest rate than your credit cards and other debt, consider borrowing low-interest money to pay off your higher-interest debt. If you do it right, you can pay down or pay off your credit cards and other debt and consolidate what you owe into one monthly payment that is more manageable. Debt consolidation may or may not work for you, so consult your financial advisor to discuss options.
You should also open a savings account so you have a separate place for savings. To ensure you are saving each month, consider setting up an automatic funds transfer from your checking account to your savings. You might also look for a bank that offers special programs to help you save, such as First State Community Bank’s Pocket Change debit saving program that rounds up debit card transactions to the nearest dollar and places the difference in your savings account.
If you need help with financial planning, your banker can be a good resource. Talk to a financial advisor and discuss ways you can increase your savings and eliminate overspending.