Your Means Test

Here we are at a time of year when some people are in post-Christmas doldrums not that the spending season is done and credit card statements are rolling in. It is a pause for reflection on how much money you were going to spend (if you had a budget) and realizing how much you did spend. It further extends to some of us looking at how much money we are spending in general.

Living beyond your means is easy to do in a debt driven society. All we need to do to purchase an item these days is swipe a credit card and on we go to the next purchase. The days of using cash are numbered which makes reckless purchasing even easier. Additionally, social pressures are ever present thanks to the internet which are contributing to the financial instability we see globally.

But what does that mean and how do we determine if we are spending more money then we have and should? I think that the challenge some people face is they do not know how to realize this or what to do about it. Some will just say live off a budget and watch what you spend. Sometimes the logic and reality do not co-align. If you are concerned that your finances could be in danger, here are some key indicators to help you determine whether you're living beyond your means. 

You have no emergency fund or savings.

Part of the reason you need to save at least 10% is to have cash set aside for the inevitable emergency. Putting emergencies on your credit card or taking out a loan will continue the cycle of living beyond your means. It is advised that you have 3-6 months’ worth of your monthly expenses set aside.

Your living paycheck to paycheck.

Do you know that 76% of Canadians lived paycheck to paycheck in 2015? Many of these people believe they do not have the required salary to set aside savings or cannot afford to reduce their current lifestyle. While I find this hard to believe, we all have a few expenses we can cut back on.

You borrow from friends and family or take out loans to pay bills.

Unbelievably people take loans out to pay their bills. In other words, they are taking on more debt to pay debt they already have. Logical, right? This is a clear sign that you cannot afford your current lifestyle.

The percentage you're paying is too high priced While you're living beyond all your means And the man in the suit has just bought a new car From the profit he's made on your dreams. Steve Winwood

Your credit score is below 600.

Credit bureaus keep track of your payment history, outstanding loan balances and legal judgments against you. They then use this information to compile a credit score that reflects your credit worthiness. The numerical rankings go from a low of 300 to high of 900 (referred to as your FICO score). The higher the better. It's this score that lenders use to determine whether they'll grant a loan. In general, any credit score below 600 means that you are probably in over your head.

If you aren't sure what your credit score is, contact one or both major credit bureaus (TransUnion and Equifax) and have them send you a copy of your credit report. This document will tell you what the bureaus — and ultimately lenders and financial institutions — think of your finances. An important point to note is that your report details may differ between the credit bureaus as can your FICO score. It is wise to obtain each report and review the details to ensure they are accurate and correct. Often, they are not.

Your saving less than 5%.

A savings rate below 5% means you could be in real danger of financial ruin if someone in your family were to have a family or medical emergency. With savings, this low, it likely means you wouldn't even have the money to pay the necessary insurance deductibles. Ideally, everyone should try to save as much as they can, but in terms of targets, the rule most financial advisors suggest is 10% of your gross income. Beginning at age 30, if you were to save 10% of your $100,000 annual income in your RRSP, or $10,000 every year, and earn an annual rate of return of 5%, that money would grow to more than $900,000 by age 65. 

We are all advised to save at least 10-15% of our income but if you can’t even save 10% then you may be living beyond your means. It is important to note that any savings is included in this number whether it be RRSP contributions, emergency fund contributions, investments, or deposits into your bank account. Those who want financial security during their retirement years must make sure that they aren't among those who are spending more than they make. If you are saving less than 5% of your gross income you are likely in over your head.

Your credit card balances are rising.

If you are one of those people who pays only the minimum due on their credit card balance each month or if you send in only a small contribution toward the principal balance, then you are most likely in over your head. We all have a tight month every so often but if you find yourself constantly paying the minimum payment you will see your monthly minimum payment skyrocket as the average interest rate on a credit card is 15%. If you only do this once it can be forgiven but if you live your life paying the minimum payments, you should reevaluate your current lifestyle.

Ideally, you should only charge what you can pay off at the end of each month. When you can't afford to pay off the balance in its entirety, you should try to make at least some contribution toward the outstanding principal. The importance of paying down credit card balances as soon as possible cannot be overstated. A person with $5,000 in credit card debt that makes the minimum payment of just $200 per month will end up spending more than $8,000 and take almost 13 years to pay off that debt.

There is no dignity quite so impressive, and no one independence quite so important, as living within your means.Calvin Coolidge

Your house consumes more than 30% of your income.

Calculate what percentage of your monthly income goes toward your mortgage, property taxes and insurance. If it's more than 30% of your gross income, then you are likely in over your head. The rule of thumb is that your monthly mortgage payments should not exceed 30% of your gross pay. If you pay more than 30% your home is likely too expensive for your current earnings.

Why is 30% the magic number? Historically, conservative lenders have used the 30% threshold because their experience has told them that this is the rate at which the average person can get by, make their mortgage payments, and still enjoy a reasonable standard of living. Certainly, some homeowners can get by spending a higher percentage on their homes, particularly if they cut back elsewhere, but it's a dangerous line to walk.

Note that if you are currently spending more than 30% of your gross income on housing, it may be because many lenders have loosened their requirements over the last decade and allowed some to borrow as much as 35% of their income. The federal government has implemented some controls over the last few years to contain this such as returning to a maximum of a 25 year amortization and eliminating the ability to buy a house without a down payment.

Your mailbox overflows with overdue notices.

You cannot close your mailbox or find space on your desk as there are envelopes from creditors everywhere. At the end of the month you must decide on who to pay and how much to pay them. At this stage, you are living beyond your means and need to seek help.

You take a loan out to vacation.

We all want to enjoy life but if you find yourself taking a loan out to go on a vacation as you do not have the funds you may be living beyond yourself. Ask yourself, “do I really need this right now?”

You cannot afford the essentials.

If you find yourself not being able to afford food, toiletries, and clothes there is no question that your money is being used inappropriately.

 We discussed politics, but we also talked about the importance of hard work, personal responsibility, living within your means, keeping your word. Those lessons stay with you throughout your life. Bob Ehrlich

Your bills are spiraling out of control.

Buying on credit and paying by installment has become a national pastime. It's much easier to buy a new flat screen TV when the salesman breaks down the price in monthly installments. What's an extra $50 per month? The problem is that these bills start to add up and you end up edging closer to a consumer proposal or worse, bankruptcy. If your monthly income is being sliced and diced to pay for dozens of unnecessary installment purchases and services, you are likely in over your head.

Lay out all your monthly bills on your kitchen table and go through them one by one. Do you have a smart phone bill, an internet bill, a premium cable TV package, a satellite radio bill and all those other gadgets that generate countless monthly bills? Ask yourself whether each product or service is necessary. For example, do you really need a 500-channel premium cable TV package, or would you really notice the difference if you had fewer channels and paid less?

Some of the best places to find savings include your smart phone bills (watch the date usage), your utility bills (turn off the lights, don't run the air conditioning if nobody is home) and your entertainment expenses (you could stand to dine out less and pack a lunch for work).

Your afraid your friends will judge you.

Social media can be the devil to your wallet. Ever find yourself buying items to please others? Buying items to post a picture on Facebook, Snapchat, or Instagram can be a costly habit. Evaluate what you really need and stop pleasing others. What would I say? Maybe it’s time to pass them up.

Your bottom line.

As a nation, we have a long way to go before we reach any sort of collective financial responsibility. To avoid becoming part of the gloomy consumer proposal and bankruptcy statistics, it's important to measure your financial health regularly. The warning signs presented here are not death sentences; instead, they should be seen as symptoms that allow you to diagnose a problem before it gets worse. Measuring is a key part of Financial Life Planning and Keeping Life Current.

Steve is the SBCN Community Mentor and can be reached at