It is important to spend less than you earn so that there is a surplus of income which can be saved and invested to take care of growing financial needs. Here are some early signs of stress and what you should do to improve your savings.
Are you always worried about money and are desperately waiting for the next pay check even though your monthly income is good enough? It could be a sign that you are overspending or living beyond your expenses. This financial lifestyle has to be checked else it can lead to financial troubles. Here are some signs that indicate that a person spends more than what he/she should:
1. Their income never lasts the full month: People living beyond their means never have enough money. Their current salary / income always dries up much before the next one is due. They are always struggling to meet expenses. This shows that they are overspending and not following a budget. It also means there is not much savings.
2. They are struggling to pay up bills: If a person is always struggling to pay the rent, credit card bill or EMIs, the person might be living lavishly compared to the income earned. Such people should consider cutting down expenses like living in a place with less rent or spending less on luxury items or selling off the car. If this lifestyle continues, they will be in major financial trouble soon.
3. They would be in a fix if there is an emergency: It is important to have some emergency fund so that the financial aspect can be taken care of. Some people struggle to face emergencies or end up borrowing from family and friends in case they are hospitalized or get into some financial obligation. These people are definitely living beyond their means and have to take steps to handle it. A financial plan always has place for an emergency fund.
4. Savings rate is less than 5%-10%: Experts recommend at least 10% of the income needs to be saved. If a person cannot save even this much, he/she is living beyond their means and have to take quick steps to find out and curtail unnecessary expenditure.
5. Exceeds credit limits routinely: People living beyond their means normally exceed their credit limits. They use credit cards in all purchases and probably use one credit card to make the payment of another. This is not a small issue and if this continues, they can get trapped in a credit spiral and head for financial disaster.
One should live within his means so that he can generate surplus which can be used to save and invest. Here are some steps to ensure that one spends only as much is prudent.
1. An emergency fund should be set aside.
2. They should take steps to keep mind and body healthy so that mental stress can be handled and physical ailments can be prevented.
3. They should avoid making impulsive purchases. If a friend has a new car or there is a “deal” on the latest HD TV, one should not buy immediately but go home, think about it and make a calculated decision.
4. Lifestyle inflation should be avoided. It means with an increase in income, a person increases his standard of living. He graduates to more expensive phones, a bigger car and more expensive vacation. An increase in income should be planned properly so that savings, spending and investments are planned such that financial health is improved.
Living beyond one's means for a long time can cause irregularities in one's financial life. It is important to get the finances in order so that one can achieve the financial goals set.
The author regularly writes on personal finance at www.gettingyourich.com.