A recent Business Insider article revealed a disturbing trend: Americans are spending more even though they’re earning less.
The article details how personal income dropped by 3.6% in January, most likely due to the 2% payroll tax that went into affect. At the same time, spending increased by 0.2% the same month.
What this really means is that more and more people are likely living beyond their means, choosing credit over cash and racking up debt in the process.
Before you end up spending more than you earn, here’s a refresher on how to avoid living beyond your means no matter your income.
1. Keep spending steady when income increases
Living within your means is only possible when spend less than what you earn. Unless you’re sitting on a pile of cash, you’ll end up in debt sooner or later.
One way to avoid this: keep spending the same, even when your income increases.
It’s easy to fall victim to lifestyle inflation and spend more whenever we start making more. This mindset keeps us from ever getting ahead.
Instead, if you get a raise, put the difference or as much of it as you can in the bank. If you pretend you’re still making the same amount, you’ll be able to scale up your savings and avoid upping spending to go with it.
2. Look beyond monthly loan payments
It’s easy to assume that as long as you can make the monthly payment, whatever you’re financing is affordable. But how long are you paying for, and how much will interest charges add on to the cost?
Picking a 30-year mortgage instead of the 15-year option will mean lower monthly payments and might let you afford more house. The same goes for 60-month auto loans instead of choosing 36 months to finance.
If you’re stretching out the period of the loan, you may be crossing the threshold of what’s affordable and what’s not. Don’t use longer loan terms to bring a car or house into your price range when it really isn’t.
3. Ensure credit card balances are decreasing, not increasing
An easy way to judge if you’re living beyond your means: track your credit card balances.
If they’re dropping month to month, that’s a good sign. If you don’t have any, that’s even better. But increasing credit card debt means you’re spending more on cards than you can afford to. Your problem only gets worse once you factor in interest.
Make sure your credit card balances are going lower every month. If you can’t do that, consider cutting up your cards.
4. Skip the ‘I’ll pay later’ attitude
Your approach to money matters and your attitude can be the difference between being debt-free or not.
One way to end up in trouble: living in the future with your money. Whether it’s with vacations, gadgets, or a car, a “buy now, deal with payments later” attitude is never a winning strategy.
We all know the next paycheck is coming, and we might be expecting a raise within the next year, too. But until that money’s in your bank account, you shouldn’t spend it.
Don’t put that big purchase on credit with plans to pay it off once you can afford to. Save up first or don’t buy it at all.
5. Save at least 10%
While saving 10% of what you earn is just a general (and perhaps arbitrary) rule of thumb, it’s not a bad yardstick to measure how much you’re actually putting aside.
If you’re living paycheck to paycheck, you might not be saving anything. You’re likely spending your entire paycheck or more than you bring in each week.
6. Avoid bad financial products
There are many bad deals out there, and those with good financial sense can see the harm these things cause. Whether it’s payday loans, rent-to-own stores, cash advances on a credit card, or bad credit card offers, you’re paying some combination of outrageous fees and exorbitant interest rates.
Relying on any of these can make your financial situation worse-off in the long run, so just stay away.
7. Be happy with what you have
One reason you could be spending more is that you’re not happy with what you already have. It’s common to hear “If I just had ____, I’d be happier.” Fill in the blank with a new car, bigger house, or anything else.
Often, these things don’t really increase our happiness anyway. So why let our happiness depend on them? Choose to be happy now with what you have, and you won’t need more money to start.