How to tell if you're living beyond your means
Somewhere in our money culture, in the way North American consumers behave, appears to lie an unshakeable desire to spend what isn't ours.
Some figures are stirring: Canadians and Americans tend to put much more on their credit cards -- the most active method of day-to-day loan-taking -- than almost anyone else in the world.
Not me, you might say. I'm responsible with my money. I don't spend beyond my means.
Don't you? Take a look at these key points to determine whether or not you are living outside your financial comfort zone.
Personal finance site Mint.com often comes up with great features, and its latest "signs you're spending too much, stupid" rundown surely fits the bill.
*Bing: How to rein in your spending
Mint came up with seven ways to tell if you're living beyond your means, a tough-to-define set of circumstances that's kind of like pornography: you just know it when you see it.
What to look for? Here are seven ways, per Mint:
1) You couldn't live without your job's income for at least six months: The old "emergency fund" argument, but with an add-on. Standard workers need six months' income in the bank to be safe; self-employed workers should have 12 months' income saved up.
2) You vacation on credit: Credit for groceries? Sure. A week-long vacation that takes you more than seven days to pay off? No.
3) You only consider monthly payments when buying a car: Mint says to live by a simple formula when purchasing a new ride. If the loan you're getting is longer than three years and doesn't result in you owning the car outright at the end of 36 months, you're probably outside your budget.
4) You've arrived at the home you can afford based on a 30-year fixed mortgage: 30 years' worth of house payments can mean six-figures worth of interest payments over the course of the loan. Go shorter -- 15 years, say -- or aim for a cheaper home.
5) You've paid an overdraft fee in the last 12 months: No explanation needed. If you're touching the overdraft limit, your liquid income ain't right.
6) You've exceeded your credit limit: Same principle. A limit is a limit is a limit.
7) You're in debt but you pay someone to do a job you could by yourself: A wonderful tip we rarely see given. If you're scraping the bottom of the barrel but still pay someone to do things you could do on your own -- from lawn-cutting to childcare -- it's time re-evaluate.
Disagree with anything on the above list? Tell us below.
By Jason Buckland, MSN Money
Posted by: Angelo | Jan 29, 2013 4:21:55 AM
I disagree with the car loan part, i do not know to many people that buy a brand new car a pay it of in three years. standard is 4-5 years.
Posted by: Patrick | Jan 29, 2013 8:35:38 AM
A house you can afford in 15 years? What world are they living in? the 1970's perhaps? Even small, no upgrade, basic of the basic townhomes cost 300,000 nowadays. If you took out a 15 year mortgage including land tax, interest and mortgage payment you'd be well over 2,000 a month just in the mortgage payment. Add in Gas, Sewer & Water, Hydro, Groceries, and most people wouldn't be able to afford it.
And you're suppose to be saving up 6 months of expenses? 12,000 alone for your mortgage + land tax. Add in another Conservative 3,000 for Groceries, Hydro, Gas, and Water bills and you're looking at 15,000 that you're just suppose to save and sit on.
Who has the ability to cradle over 15,000 in savings and be throwing over 3,000 a month in living expenses for just the "Bare Essentials"
You'd be unbelievably house poor under those circumstances and clearly don't even think about having a child...
According to these people everyone is apparently making 50K+ a year in a depressed economy.
Those 2 pieces of advice are unrealistic and don't even mention the strength of a 30 year amortization as you can save on the interest paid by saving up for lump sum payments year after year.
Posted by: Rob | Jan 29, 2013 8:52:20 AM
1) 6-months take-home pay in the bank? I don't really agree with that. I think as long as it's somewhat accessible - in an investment vehicle (RRSP/TFSA etc) is probably okay. Paying the tax on withdrawal hurts a little, but at least it's making a bit of interest for you - and it's an emergency fund, it won't be an easy pill to swallow regardless of how painless the withdrawal is. $20-30k in a bank account just to have is stupid in the days of low-interest.
3) That formula is good advice, but also consider new cars last much longer than before. A new car can last 6-7 years before minor issues and crop and and live a full 10-15 year service life. Car makers are offering 0-3% on 4-7 year loans, take advantage of them if you can. It's also nice to have the safety of a new car and the planning ability of a lower payment. I'd rather spread my car payment out a bit and put more down towards the principle of my mortgage, thank you.
4) 15 year mortgage is a nice idea, you can aim to pay it off in 15 years but amortize over 25 years. Pay the extra 'double-up' payments or yearly lump-sum payments to knock down the principle... but why tie yourself to a high monthly payment, you never know when that extra $300 a month might be needed. If it isn't - pay into the house, if you need it - be glad you have it without using the credit car. The house can be based on 25 years, but the interest rate you can afford should be based on 5-6% or more. Then get a variable rate and pocket the massive difference between budget and actual payments and pay it in towards the principle whenever you can. By the time the rates get up to 5-6% on a variable loan, you will have so much of the principle knocked down you will be in a safe position to pay 7-8% on the remainder and stay afloat.
Basically this advice can't apply to younger people. If you have a new home, are early in your career, and have other expenses it's almost impossible to 'live within your means' as you specify. There just aren't cheap enough houses available where the good jobs are... not in safe neighborhoods anyway! Same goes for cars. I'd take a reliable car that gets me to my job over a banger that might need $2000 in repairs out of the blue for $100 more a month in payments. Employers don't take kindly to calling in due to repeated car trouble - good way to lose your job.
You can live safely and be smart about where to spend your money each month and enjoy a better life then the one you lay out... This advice was practical back when my parents were starting out, but interest rates were 10+% back then too. Basic thing is don't take on bad debt, try to earn more money (and not spend the difference), and be smart about good/necessary debts.
Posted by: jerry | Jan 29, 2013 10:01:10 AM
half the auto worker woud be out of work ,50% of auto loan are 5 years plus for most people.the average person cannot aford three year car loans any more , plus 50% of people in Ontario live
pay to pay, welcome to the new standard of living
Posted by: Ray | Jan 29, 2013 11:52:28 AM
The above guidelines served me well. Lived like Mr Scrooge until I could pay cash for my first VW Beetle. Back in the day army pay was about minimum wage and I had three kids and a stay at home wife. Bought my first three year old home after cashing in my Canada Savings Bonds and cancelling my Life Insurance; it was just 720 sq ft, but it was home. Problem is that nowadays everybody wants a huge SUV or two and a house they can get lost in. Get rid of your cell phones and forego the double double and save for a good downpayment and you'll manage just fine.
Posted by: Patrick | Jan 30, 2013 8:54:18 AM
@Ray,
My down payment was 105,000 on my wife and my's little townhome. (I'm good with money..)
I had 0 student debt from living at home during my post secondary and working 45+ hours a week during the summer as well as between 20-30 hours a week during school.
We almost never go out unless we have coupons, discounts, work perks or something to cut the cost of a night out. (Our latest night out was at a comedy club only because we won 10 free tickets.)
We price match groceries, coupon like crazy to save on top of price matching (which saves us gas, time and money.) and my wife finds most of our clothes at either Winners or Value Village for the cheap.
We live very modestly and make decent salaries. We have no Home phones, no Cable Television, and a car from 1998.
Even with all the scrimping and saving we do it would still be impossible to have a 15 year mortgage and be saving for retirement as well as having 6 months expenses "just in case."
This advice is not sound. It is not representative of the times and I believe your "back in the day" is probably the usual Baby Boomer mentality of not understanding anything of how the world operates today.