Are You Living Beyond Your Means?
Posted by Gail | Filed under Uncategorized
This week I’m re-posting blogs that will ask you to think about how you’re using your money. As we approach 2010, there’s no better time, psychologically, for turning over a new leaf than the beginning of a new year. But before you can hope to be successful, you have to first do some thinking, some reflecting on what’s happened over the past year, and some assessment of what’s been working and what hasn’t. So this week, here are five blogs that ask, “Are you…?”
BTW, tomorrow I’ll announce the winners of 3 copies of Debt-Free Forever. And y’all should pop over to www.debtfreeforever.ca to see the new site to support the book.
We’re in a pickle. We aren’t saving enough and we’re carrying record levels of debt. Not just mortgage debt, though many of us have more than we can manage in terms of mortgage payments. Noooo. We’re carrying record levels of debt on our lines of credit, our credit cards, and the plain-ol’-boring loans. Why? Simple. We’ve forgotten how to live within our means. We’re ricocheting out of control, spending money we’ve yet to earn. We’re buying STUFF we think we NEED, when all we’re doing, really, is scratching our consumer itch. I mean to say, do you really NEED a TV? Do you really NEED another pair of pants? Do you really NEED that better-than-ever cell phone, camera or power saw?
The fact that we can’t seem to get to the end of the month before we get to the end of the money should be our first clue. Here’s what I mean:
GA writes: We have a $50,000 line of credit as well as $45,000 in credit card and personal loans. We have a child starting college in Sept, another following in 2 years and a 2 year old. I have tried to trim our budget but can find no leeway. Grocery seems to be the biggest budget buster. We have cut eating out to once or twice a month but still have to reach for our credit cards by the end of the month. Any ideas where I should look to trim the fat and how do I cut back on the grocery bill? It seems the costs are up every time I go to the store.
Here’s a frustrated soul who can’t figure out how to cope with rising food costs because there is no wiggle room in your monthly spending. With $95,000 in debt, a minimum repayment amount of just 3% would mean a monthly payment of $2,850 a month. OMG! I’m sorry, GA, but FOOD is not your biggest budget buster; debt repayment is.
And that’s exactly the problem so many people are facing. They can’t figure out how to repay the money they have borrowed and have a life at the same time. Not surprising, really. You’ve already spent $95,000 you haven’t yet earned (and that would be after tax dollars, I’d like to point out).
So what other clues might there be that you’re living beyond your means?
Are you saving less than 10% of your net income? Yes. Then you’re living beyond your means. You see, if someone in your family were to have a medical emergency or a blip in their employment, if your roof were to leak or your car give up the ghost, if you should have to cope with a major move, the care of an aging relative, or educational expenses, you’d be up a creek without a paddle. Right GA? Ideally, you should save as much as you can, with 10% of your gross income being a guide.
Are the balances on your credit cards or lines of credit rising? Yes. Then you’re living beyond your means. Paying only the minimum on your credit cards or lines of credit while you continue to increase the balance you owe is a sure sign you’re a dope. When, exactly, are you going to have the money to finally get rid of the debt? Is some magical wand-waving fairy god mother going to pop into your world and woosh away your debt? Or do you figure that a windfall is in your future? Hey, WAKE UP! If you have a $5,000 credit card balance at 18.9% and make a minimum payment of just 2.5% per month, you’ll end up forking over almost $8,000 in interest over the 25 years it takes you to pay off the balance.
GA owes $95,000. Let’s say she’s averaging an interest rate of just 11%. And let’s say she makes a payment of $2850 a month (ouch!) It’ll cost her almost $19,000 in interest and take 40 months to pay off the debt. Over-extended? I guess so.
Are you missing payments on bills? This is a sure way to ruin your credit rating and increase your interest costs. And it’s a sure sign you’re living beyond your means. If you don’t have a handle on what your monthly bills are, and what it’ll take in income to keep current, then it’s time to get with the program. Get out all the bills that have to be paid every month and make a list. Rank the bills in order of priority. You HAVE to pay your electricity bill, but you don’t HAVE to have premium cable (or any cable for that matter.) Okay, now deduct your HAVE TO PAY amounts from your monthly income in order of importance. When you run out of money, cancel everything else.
Are you taking cash advances on your credit cards? Yes. Then you’re living beyond your means. Cash advances, putting your groceries on credit, applying for new cards so you can transfer balances so you can fool yourself into thinking you’re paying your debt are all signs that you’re in BIG TROUBLE.
I know it’s easy to get credit. I know it’s nice to have what you want when you want it. And I know everyone else is doing it. But just because they’re all walking off the edge of the precipice doesn’t mean you should follow them. And if you’ve been walking in lock-step with a bunch of fools who can’t control their spending to the point that they put themselves and their families at risk, then it’s time to change your pace.
You don’t have to be a follower. You don’t have to continue to do what all the other dopes are doing. You can stop the insanity, take control of your future, and commit to living within your means. I know you can. Do you know you can?
December 28, 2009 at 9:16 am
A recent poster just used the term “act your WAGE”…I love that term and it really sums it all up…so simple…start acting your wage TODAY…read Gail’s fantastic new book…it is spelled out in simple clear realistic terms…chart your expenses, keep track and start living within your means today!!…
2010 Cheers for the New Year!!!!!!!!!!!!
December 28, 2009 at 10:09 am
I think the Advice here is great. taking on too much debt is a huge cause of financial strife. I love the advice on bill payments.
Regards,
Jason
December 28, 2009 at 10:44 am
I prefer to act half my wage. That allows me to retire early and spend my days pursuing my passions.
December 28, 2009 at 10:52 am
It’s funny how much of our lifestyle can be moved into the “want” category rather than the “need” category when you really start thinking about it. If you compare the size of a “small” house here with a small house in rural Africa you begin to see that most of the space is needed to store stuff. I don’t think this is bad thing. We are lucky to live in a developed nation where we are almost guaranteed to have a comfortable life (with a little hard work). And I like all my stuff, we just need to make sure we don’t get carried away with it.
To put things in perspective: Here we can run a bath, be dissatisfied with the temperature of the water, drain the tub and start over. In Guinea, they don’t have running water, let alone hot water in every household. To them we are rich beyond belief.
December 28, 2009 at 1:17 pm
As usual Gail, you are right on point. I think sometimes it is hard for people to see the forest for the trees. Sadly, like teenagers who think they are indestructible, there are adults who think they have all the time in the world to get their financial life in order. I’m here to tell you it just isn’t so. I do not know where the past 40 years have flown off to.
So keep at us Gail. Keep telling us like it is. Maybe it will sink in for some of us, especially the difference between Need and Want. That is a tough one for so many. I know I’ve mentioned this before, but, for years hubby and I would talk about ‘how do they have so much more than we do?’ or ‘look at the vacations they get to take…how come we can’t?’. Since finding Gail I know the answers. They are in debt up to their eyeballs.
December 28, 2009 at 1:34 pm
Thank you Gail for all of your helpful advise.
I am a recent graduate from law school and am painfully making the switch from living off a line of credit without a thought to saving and budgeting to learning how to deal with credit, debt, and savings. I have made a budget and it is generally working. I have had some hurdles though. For instance, I have learned twice that I should never carry my $10,000 limit credit card in my wallet. Further I have recently learned the important of saving in advance for Christmas when I ended up cash short and taking out a cash advance against my credit card (ugg). I also made a foolish mistake when I purchased a car as although it was used, it was still $20,000 (it’s a Prius). All of these mistakes you have covered in your blog and so I often find reading your articles to be like a bucket of cold water to the face reminding me to wake-up to my financial situation and learn not to do it again.
I also find it hard to both live and pay off debt, as you mention in the article. I accrued just under $75,000 dollars worth of debt from law school. As such, debt repayment makes up 35% of my net income (that includes above the minimum payments). My gross income is currently $70,000 and will be $80,000 in Jan.. My savings make up 25% of my net income. I have proudly gone from $0 in my savings account in Jan 09 to $3,620 in my RRSP and $1,200 in my TFSA. I am also have a high interest account for our up-coming wedding, emergencies, and now gifts.
All I wish is that some how my debt would be paid off magically faster. But I know one of the first lessons I learned is that there is no magic when it comes to finances.
December 28, 2009 at 3:27 pm
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May 2010 be your best year ever.
December 28, 2009 at 3:55 pm
Your voice is so, so valuable in our culture right now. I live within my means because anything else makes me slightly sick to my stomach, but I am certain that many folks I know do not. We need people like you to speak up and remind us how to get ourselves out of this mess.
December 28, 2009 at 9:50 pm
I think one of the most important life lessons we can teach our children is financial responsibility. Too bad I hadn’t paid enough attention during my youth. Now in my mid-40’s I finally “get it” and have been working very hard the past couple of years at prioritizing and getting the debt paid off – laying in bed at night hoping that I can play catch up quick enough. My daughter’s allowance is an investment in her future and no matter how tight the budget gets paid weekly. I’d rather she make some mistakes with $11. and learn from them vs. much more costly mistakes later on.
December 28, 2009 at 10:47 pm
Debbie said ^^^^^” I’d rather she make some mistakes with $11. and learn from them vs. much more costly mistakes later on.”
I LOVE what you’ve said here and think I just might steal it. haha.
I am in a battle with my other half at the moment about pocket money for our son and your comment might make sense to the OH. The boy is seven and we give him seven dollars a week. One dollar of that must be saved and the rest is his to spend or save up as he likes. OH has a bit of trouble in saying ‘no’ .. he’s coming around to the fact that Im doing this not to be a meanie mum but to instill some good habits early.
December 28, 2009 at 11:29 pm
Thanks Gail!
My husband and I were on Season 3 episode “Does Daddy Know Best”
As stubborn as we are, we both finally realized to live within our means. Our conversations about finances usually start or end with “What do you think Gail would say to us right now” We live on cash alone, no lines of credit, no payday advances (not anymore since the show) If we don’t have any money left, then there’s nothing to go over budget with. This works amazingly for us and has helped us to not incur any new debt. Our old debt is almost completely paid off (YAY!)
We’re looking forward to filming the follow-up in the new year (next week), and anxious to see if we have met Gails approval. We feel really good about our financial choices and attitude over the past few years, and we know that this would not have been possible without Gail’s help in the beginning of this journey. She truly kicked our asses in gear!
December 28, 2009 at 11:34 pm
@Jillian~you can tell your OH that the old lady of the group says that your son needs to learn the facts of life about money early. We all learn that every day here with Gail.
I love that you give him $1.00 for each year. It gives him something to look forward to each birthday – a raise in allowance. I would suggest perhaps donating a small amount to a charity of his choice as well??? Just a thought.
December 29, 2009 at 6:19 am
As a single women who has a mortgage I have chosen to live as far below my means as possible. My motto in life is “Plan for the worst and hope for the best”. I am such a finance geek I ask and got a filing cabinet for Christmas as I ran out of space in my filing box after I bought my house. I am planning on using the next week to review and file all of my financial paperwork along with laying out financial goals and priorities for the next year.
December 29, 2009 at 11:50 am
I think an important exercise that MUST be done while doing a budget is to add one of three labels to each category:
1- a true need (the simple components of food, shelter, clothing)
2- a perceived need as in what you think one should not do without but does not belong in the above category (restaurant eating, higher end house and renos, luxury clothing, car… ok in some areas ONE car could be a true need); two hints that something does not belong in #1 but should be in #2: what would people think? OR you would not give up those categories if you were out of a job (should be in EF calculations or would use credit to buy them).
3- a want (hobbies, cable TV, …)
I think this exercise is good for people who think that they never get to buy anything they WANT (especially on a budget). #2 and #3 are ‘wants’ and not necessities of life. I am not saying to omit #2 and #3, just recognise that you do have things that you buy that are in the ‘want’ category. This can helkp prioritise your ‘wants’.
December 29, 2009 at 8:59 pm
Hi
Since this post highlights my questions to Gail a year ago I thot an update might b interesting. Tho Gail couldn’t come kick us into shape we used her show as a guide.
In the past year, we have zeroed out 1 cc(yay), brought the balance of another to 1/3 of what it was ($2800.00), final paymnet on another cc will see that balance zeroed out in Jan 2010, another will zero out in Feb.2010. We hv also paid down the line of credit by approx. $2000, paid off $4000 personal loan and maintained a bit more than minimum on all other cc’s through the year, all the while using only cash and maintaining a budget. Was it tough? heck yes, were we frustrated ?yes tempted to reach for cc – darn right but we resisted. This is an uphill battle but I am happy to say we have and are persevering. Christmas was 95% cash (sorry Gail) but we have slashed out budget further n extra expense at Christmas will be paid of in Jan itself.
Plans for 2010 zero out 4 cc(Jan, Feb and 2 in June/July -God willing),keep current on all bills incl property taxes, utilities, etc(no cc), pay off the final $9000 personal loan which will leave us with 4 cc’s and line of credit to pay off, hopefully with smaller balances as time goes on. So Gail tho the advise was difficult to swallow at times, it works and for that we are grateful. Do we stumble sometimes ? Absolutely but thank God we pullourselves and keep plugging away. Hopefully next update will be even better news.
Thanks and hope 2010 is all you wish for.
Luv
GA
February 25, 2010 at 7:13 pm
With Gail’s advice I’ve paid of almost $10k worth of debt in less than a year! I am consumer debt free for the first time in my adult life and it feels GREAT! For the first time in years I’m saving for emergencies.
Thank you gail!