How To Know You Are Living Beyond Your Means

How are your 2019 money goals so far? We are in Week 48 of the #52WeekChallenge guys, just four weeks to go! It might be too late to start from scratch, but how about you join me in a sprint to the end of the year? Insulate your December pay from enjoyment by saving up starting today. Read more here.

These days, it is very easy to live beyond your means, especially because credit cards are so easy to acquire, and mobile loan offers are countless. With just a phone, you can easily access hundreds of thousands in unsecured credit. It does not help that peer pressure is right at our fingertips too, in the form of social media pictures and narratives of how our friends have better lifestyles than we do. The constant message seems to be:

You could do better

As I have written on this blog before, expenditure is visible, but unfortunately, financial prudence is not. Bragging about how good you are with money is not only socially unacceptable, it is not impressive – in fact, many people will humble-brag by pretending to be bad at money while they are not. For this reason, many of us do not realise when we have overextended and will assume that everyone around us is struggling just because we are.

How do you know that you are living beyond your means? Here are five signs:

1. You make spending decisions based on trends or what your friends are buying: Do you start the week off with good intentions money-wise, but somehow find yourself going out to lunches and after-work drinks because your friends asked that pesky word?

Uko? Where are you?

What educates your decision to upgrade your possessions, say your car/TV/phone, etc? How did you make the decision to live where you live? Was it driven by a combination of your needs and ability to pay, or were you looking to live where “people like you” live? What about your kids’ school? How much of the decision is driven by value for money, versus the need to be able to say that your kids go to this or the other school?

If your spending decisions are driven by FOMO (fear of missing out), or the need for external validation, you will sooner rather than later find yourself living beyond your means. This is because we tend to aspire after people who appear to be doing better than we are, and those aspirations drive our spending decisions if we are not careful.

2. You are using credit to fund your living expenses: If you find yourself having to swipe your credit card or use expensive mobile credit to get through the month, then you are definitely living beyond your means. It could mean you are not earning enough if the credit is going towards funding the basics. There is, unfortunately, no shortcut to this – you have to pare down your lifestyle while looking for ways to earn more money. Why not just focus on earning more? Because growing your income takes time and will often need some investment from you. You do not want to be accumulating debt while working on growing your income. Secondly, doing both gives you double gains – you save on debt interest payments, and the extra income you make goes straight to savings.

3. You are not able to save 10% of your income: Saving and investing 10% of your gross income is entry-level to the journey to financial freedom. I call this, tithing to yourself (borrowed from the Christian principle of tithing 10% of your income). If your spending margin is so thin that you cannot tithe 10% to yourself consistently, and invest this tithe to long term stuff, then you need to scale down. The easiest way to do this is to set up a standing order for this 10% saving to your investment account or SACCO, that way it forces you to live on 90%. With time, slowly grow this percentage, even as your income grows.

4. You take long term loans to upgrade your car: Some people say that borrowing for consumption is ok as long as you can pay it back. I strongly disagree with this. Borrowing for consumption robs you of money and time. This post explains it. In most of our countries, a car is a convenience that will save you time and possibly earn you some money. For this reason, it might make sense to partially fund your first car out of debt, especially if you make a sensible decision and buy a functional inexpensive car. However, if you cannot save up for your car upgrades and resort to taking loans for them, then you are living an aspirational lifestyle that you cannot afford. Calm down, drive that car for a couple of more years as you save. 🙂

5. You have money to travel on vacation but none for medical insurance. Medical insurance, especially inpatient medical insurance is the most important personal finance decision you make. In a country where we do not have social support systems, a minor accident has the ability to totally wipe out your savings and investments. This is why I say you have no business spending on luxuries if you do not have inpatient cover. This does not mean you should not enjoy life – use that vacation money to pay for insurance, then creatively vacation for cheap, or even have a holiday in your city.

In the next post, we look at how to recover once you discover that you are living above your means.