How You Know You’re Living Beyond Your Means

The first step to do this is to learn how to live within your means. At the very basic level, living within your means refers to the ability to spend less than you earn.

Money management is a skill that we all need. In order for us to be able to maximize our wealth for investment and ultimately financial freedom, we must be able to handle our finances effectively.

The first step to do this is to learn how to live within your means. At the very basic level, living within your means refers to the ability to spend less than you earn.

It means that if your monthly income is N150,000, you must be able to cover all your expenses below that.

While it might seem logical to spend only what is available, there are many ways with which we spend way beyond our income levels and they ultimately affect our financial growth in the long run. Here are some ways you live beyond your means:

Borrowing Into Future Income

Borrowing is not bad by itself. However, the only times borrowing is great is when it is used to finance a business or project that would yield money. Even when you borrow to handle emergencies or meet short term obligations, if you have to borrow every time such need arises, then you are living beyond your means.

If you want to purchase a new phone and you have to borrow in anticipation of your future income, you’re living beyond your means. If you have to borrow before the end of every month to survive till the end of the month in anticipation of your salary, you’re living beyond your means as well.

Where an obligation that is not part of your regular operations takes place and you have to borrow to meet it, you’re living beyond your means. If you are not careful, time would pass by and you would not have made any form of financial growth.

When You’re Saving Too Little

If you’re saving anything less than 10% of your monthly income, then you are one crisis away from disrupting your entire financial plan. Beyond the possibility of a financial need you might not be able to meet because of how little you are setting aside, there is also the risk that you are not saving enough for retirement at which point your productivity level and earning capacity in terms of your labour, would be much lower.

When you save little, a single recession can knock you out of the race and you would most probably still not be able to afford to purchase so many luxury items – not unless your salary and standard of living is higher than average.

When You Have No Emergency Fund

Following closely from the last point, not having a buffer fund can set you on the course to borrow. Having an emergency fund also involves having the right insurance plans like health insurance in order to avoid heavy out-of-pocket spending. They would help you maintain good financial balance even when emergencies or contingencies arise.

Your Bills Are Too High

When you realize that your bills are spiraling out of control, you are certainly living above your means. Can you truly afford to stay in the house you stay in now?

If your house along with its expenses like power, water, and other services take up 30% of your annual income, then you are living in a house you cannot afford. Can you afford the car you are driving?

How much do you spend on fuel and maintenance? You need to review all your expenses to determine your actual cost of living. When you do, cut off the excesses.

Where You Are Not Investing

Time value of money means the value of your money now and the value of your money in the future are not the same. With inflation rate constantly on the rise, your saving account interest rate would always be below the inflation rate.

This means that when you don’t invest, your money would constantly be reducing value as it goes into the future. Investing on the other hand, allows your money grow exponentially.

In order for the sacrifices you are making now to pay off in the future, your funds need to grow and compound with time and a good growth rate. Without investing, even when you are in retirement, you would still struggle to maintain a good standard of living. It’s not worth it.

Written by Lawretta Egba.