Are you living beyond your means?

Jet, March 22, 2004 by Melody K. Hoffman

Everyone has his and her own standard and quality of living. Be it a comfortable home, a magnificent wardrobe or that fancy car, we each have desires in the materialistic world.

However, if you've been wondering why your paycheck can't pay all of your bills or if you're trying to eliminate living paycheck to paycheck, the answer may not be that you need a higher-paying job or that "raise" you've been waiting for. The solution may be much simpler than that. Perhaps you're living beyond your means?

Michelle Singletary, nationally syndicated personal finance columnist for the Washington Post, says you are living beyond your means if you're not putting money away from every paycheck or if you are making minimum credit card payments and not getting ahead on your debt.

"For the American public, it's been okay to live beyond your means for too many years," asserts Singletary, the author of 7 Money Mantras for a Richer Life: How to Live Well with the Money You Have. "The number of personal bankruptcies is up; unemployment for African-Americans is way up--it's double what the national average is for others. When you look at the statistics about how Americans are handling their finances, you realize it's not okay to continue to live an inflated lifestyle with other people's money. Many of us are living the American dream on borrowed money, on credit, so it's not okay."

Experts emphasize that if and when you've established financial security, then you should enjoy the fruits of your labor with that dream vacation or dream car. However, if you have a closet full of designer clothes and shoes, but have to juggle your bills, or you own a $70,000 vehicle, but you're renting an apartment, you are living above your means and should examine how you can better spend your money.

Pierre Dunagan, president of the Dunagan Group, a financial services firm based in Chicago, says a sign that people are living above their means is that their expenses exceed their income. A lot of people are not aware of this, he says.

"First, find out where you're at in terms of your spending. I suggest you take index cards when you get paid and write down everything you spend for a month, add it all up and then compare it against how much money you actually brought in, and many people will be shocked to find out that they're spending more than they make. You say, 'How can I spend more money than I make?' You use your credit cards to make up the difference or you borrow money to make up the difference. That's how your credit creeps up, and you realize your expenses are actually more than what you make," explains Dunagan.

Financial expert Gaff Perry-Mason, co-author of Girl, Make Your Money Grow!: A Sister's Guide to Protecting Your Future and Enriching Your Life, agrees that a way to live comfortably with the money you have is to examine where your money goes so that you can cut back. Then, you can actually find the money to save and budget to buy what you want. "But don't deprive yourself to the point you get discouraged and say forget it and go on a shopping binge. Take it in small steps, baby steps. Say, 'I'm going to start today by cutting back on this.' And before you know it, you'll be there."

By living lifestyles outside of what we can afford, Americans are rationalizing what we desire as an essential or a necessity.

"It is unbelievable how we have blurred the line between need and want," says Singletary. "I don't care what anybody says, a cell phone is not a need. You must consider your cable and cell phone as splurging because it is. You don't need cable. It's outrageous that folk who have no savings will say, 'I can't live without cable,' or 'I need a cell phone in case of an emergency.' Hogwash.

"It's okay to splurge on such services, but only after you have taken care of the financial basics, such as saving three to six months in living expenses and saving for your retirement or for your kid's college education. If you aren't doing these things first, cut off the cable and hang up that cell phone. Instead, read and write a letter," Singletary declares.

Financial planners say to get ahead, we must build our wealth and assets. To do this we must start by eliminating our debt and pay bills on time to keep a great credit score for financial freedom. This cannot be done when we don't have goals and we overspend on depreciating assets (items that lose their value over time), such as automobiles, furniture, clothing and electronic equipment.

"A lot of people really don't have goals beyond Saturday night and that causes overspending," says Dunagan, a financial planner. "They have a lot of dreams, but the difference between a goal and a dream is that a goal has a plan attached to it. A dream is that I want to be rich, but I don't have a plan of how that's going to happen."

A pitfall for many of us is that after the essentials are paid for, we feel propelled to spend the money left over in our bank accounts (discretionary income) on various items because it is available. But truly, this amount of money should be saved for a rainy day if you are not purchasing something you need.