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Are You Living Beyond Your Means

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Are you liv­ing beyond your means?  Read this list and find out if you’re set­ting your­self up for finan­cial trou­ble in the future.

You couldn’t sur­vive finan­cially with­out your job’s income for at least six months.

This is the uni­ver­sally touted emer­gency fund finan­cial advi­sors love to talk about. In its 2012 annual finan­cial lit­er­acy report, the National Foun­da­tion for Credit Coun­sel­ing (NFCC) found that two out of every five adults (40%) said they were sav­ing less than the prior year, and 39% didn’t have any non­re­tire­ment sav­ings. Whether you call it a rainy day fund, emer­gency fund or cash reserve fund, it needs to be estab­lished and replen­ished over time, says Sheryl Gar­rett, founder of Gar­rett Plan­ning Net­work, a group of fee-only finan­cial plan­ners. And she knows it’s bor­ing: “I’ve met very few peo­ple who enjoy sav­ing money in their cash reserve account. It’s not inter­est­ing, fas­ci­nat­ing, or com­pli­cated. Yet, it’s one of the most crit­i­cal and fun­da­men­tal con­cepts in per­sonal finance,” says Garrett.

Gen­er­ally, cash reserve need is based on how long you expect to be unem­ployed if you lose your job. Three months of expenses is rea­son­able, six months is ideal – par­tic­u­larly for self-employed peo­ple and those with volatile incomes, Gar­rett says. But it could also come in handy for other emer­gen­cies like a major med­ical expense or expen­sive home repair. How much do you need to meet your ongo­ing monthly liv­ing expenses, includ­ing mort­gage, food, insur­ance, car main­te­nance, util­i­ties, etc. — should you lose your job or need to pay a major med­ical expense? That’s how much you should set aside.

Bot­tom line, based on your skills (pre­sum­ing the indi­vid­ual is not already retired) how long would it take in this mar­ket to find another posi­tion with sim­i­lar income,” Gar­rett says.

 

You’re sav­ing less than 10% of your pay.

Finan­cial advis­ers dif­fer on the ideal sav­ings rate, this is a gen­eral guide­line. “If you haven’t been sav­ing at least 10% of your income for retire­ment since age 25, you’re not sav­ing enough,” Gar­rett says. And if you’re over 35, you should tuck away more than that.

To put this in some con­text, a 2011 paper pub­lished by the Cen­ter for Retire­ment Research at Boston­Col­lege, “How Much to Save for a Secure Retire­ment,” tried to cal­cu­late the sav­ings rates required to main­tain pre-retirement liv­ing stan­dards. The authors found that, assum­ing a 4% with­drawal rate dur­ing retire­ment, some­one who starts sav­ing at 25 and retires at 70 needs to save 7% of earn­ings to achieve an 80% replace­ment rate at retire­ment. But if you’re plan­ning to retire at 65, you’d need to save 15% of your income.

 

Your mort­gage pay­ment is more than one week’s salary.

This one answers, in part, the all-important ques­tion, how much home can you afford? The one-week salary fig­ure is a rough guide and “means that your mort­gage pay­ment would not be more than one-quarter of your income,” says Harold Even­sky, cer­ti­fied finan­cial plan­ner and pres­i­dent of Even­sky & Katz Wealth Man­age­ment in Coral Gables, Fla.

Another way to think about this one is you’re prob­a­bly liv­ing above your means if more than 35% of your income (a more-forgiving num­ber) goes to into your home (rent, main­te­nance, upkeep, mort­gage), says Rick Kahler, a CFP in South Dakota. “It’s a gen­eral rule of thumb; some lenders may say 30% and oth­ers 40%,” he says.

 

Your credit card bal­ance has remained the same for the past year.

Sim­ply hold­ing your own (where your bal­ance remains the same) is a good sign you’re liv­ing beyond your means, and if your bal­ance grows each month, you’re way out of bounds. “I believe those are good lead­ing indi­ca­tors because credit card debt is very expen­sive, not tax deductible and, unlike mort­gage debt, does not finance a poten­tially grow­ing asset,” says Even­sky. (Credit card debt typ­i­cally funds either a depre­ci­at­ing asset, like a car, or a lifestyle event, like a vacation.)

 

You buy big-ticket items through interest-free, deferred-payment offers because you think you’ll be able to afford it next year.

Whether these deals are of the “Buy now and pay no inter­est until next year” or “No monthly pay­ments for six months” vari­ety for a fur­ni­ture set or new washer and dryer, they sound entic­ing but can be deadly. These retailer deals involve no monthly pay­ments for a cer­tain period of time (usu­ally a year) or no inter­est on pay­ments made dur­ing the pro­mo­tional period. But if you fail to pay for your item in full by the set dead­line, you’ll get hit with sky-high inter­est charges. And it’s com­mon for inter­est to be charged to your account from the date of pur­chase. If you can’t afford to buy it now, will you be able to later?

 

You use one credit card to pay another credit card’s balance.

Another symp­tom of liv­ing above your means: You’re always look­ing for new cards to trans­fer the bal­ance to “but never seem to get ahead,” says Erin Baehr, a CFP in Strouds­burg, Pa. If you’ve racked up debt on a high-interest card, mov­ing the bal­ance to one with a lower inter­est rate will save you money in the long run. But if you’re doing a bal­ance trans­fer because you need to raise your per­sonal debt ceil­ing, that’s not good, says Scott Bilker, founder of DebtSmart.com and author of “Talk Your Way Out of Credit Card Debt.”

 

You pay an over­draft fee on your check­ing account every three to four months or more.

Over­draft fees — or “non-sufficient funds fee” in bank-speak — are charged when there’s not enough money in your account to cover a check or debit card pay­ment. And con­sumers might not even know they could get hit: A May 2012 sur­vey of con­sumers com­mis­sioned by Pew’s Safe Check­ing in the Elec­tronic Age Project found that nearly one-fifth (18%) of con­sumers incurred an over­draft penalty fee in the pre­vi­ous year, and more than one-third of sur­vey respon­dents weren’t aware their bank offered over­draft cov­er­age until they incurred a penalty, which range from $30 to $35.

One-off over­draft sit­u­a­tions aren’t nec­es­sar­ily an indi­ca­tor [of liv­ing beyond your means]. It’s the ongo­ing, repet­i­tive nature of over­draft fees that will sig­nal a prob­lem,” says Mary Beth Stor­jo­hann, CFP with wealth adviser Hoyle Cohen in San Diego.

Before buy­ing some­thing, you often think, “I know I shouldn’t, but…”

I know things are tight, but I need to take that vaca­tion, it’s for my men­tal health,” or “I work so hard, I deserve that new flat-screen TV.” Sound famil­iar? “That’s really ratio­nal­iz­ing what you know is not a good idea for you… Like a spa day or expen­sive din­ners out. I don’t often hear that from peo­ple who are com­fort­able finan­cially, but more so from those who are strug­gling,” Baehr says.

 

 

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