Are you living beyond your means?
A report recently released by the U.S. Census Bureau paints a mixed picture when it comes to household debt in the U.S. On the positive side, the percentage of households holding some form of debt declined between 2000 and 2011 - from 74 percent to 69 percent. On the negative side the median amount of household debt increased during this period - from $50,971 to $70,000 (in 2011 constant dollars). Some experts say this could be a sign that many Americans are feeling more optimistic about their finances as economic conditions slowly improve, so they are willing to assume more debt.
But should they be? Another Census Bureau study that measured household wealth in the U.S. over the same period determined that median net worth excluding home equity showed no statistically significant change between 2000 and 2005, but decreased by 18 percent between 2005 and 2011.
Given these statistics, it may be wise to think about whether you might be living beyond your means. Here are five questions to ask yourself that could help you determine if this is the case:
1. Could you live without your salary for six months if you had to? Many experts recommend saving enough money to cover a minimum of six months’ worth of living expenses and keeping this money in a liquid (and preferably FDIC-insured) savings account. This way, if you lose your job unexpectedly, you will have a cash cushion to cover you for at least six months.
Or, the money will be available if you face a financial emergency or unexpected large expense, like a major home repair or large medical bill, thus saving you from having to go into debt to pay for it.
2. Have you exceeded the credit limits on any of your credit cards? In addition to signaling that you may be living beyond your means, this will also probably cost you in additional fees and dent your credit score, since one component of your score is your debt utilization ratio.
3. Do you take vacations on credit? Returning home from vacation to “reality” is bad enough - but returning to huge credit card bills is even worse. You could end up paying much more than the actual cost of your vacation in interest charges if you put it on a credit card and don’t pay it off immediately. Some experts say it’s OK to charge vacation expenses on a credit card for convenience sake and to rack up points, but stress the importance of paying the balance in full when you return.
4. Do you have debt but still pay others to do jobs you could do yourself? These jobs might include cleaning your house or mowing your lawn. Instead of hiring a cleaning or yard service, consider doing the work yourself and putting the money you save toward paying down your debt.
5. Do you gauge your ability to buy a new car based on the amount of the monthly payment? Just because you can afford the monthly payment doesn’t necessarily mean you can afford a particular car. One rule of thumb is to make sure the loan is paid off and you own the vehicle in three years or less. Or better yet, save up enough money to buy the car in cash.
Material contained in this article is provided for information purposes only and is not intended to be used in connection with the evaluation of any investments offered by David Lerner Associates, Inc. This material does not constitute an offer or recommendation to buy or sell securities and should not be considered in connection with the purchase or sale of securities. Member FINRA & SIPC