In a recent episode of the Suze Orman show a caller asked Suze for her definition of living beyond your means. Suze responded with the following, “If you have credit card debt of any kind that you cannot afford to pay in full at the end of the month you are NOT living within your means.” Suze clarified the definition by including specific purchases like vacation, clothes, manicures and spa services, which cannot be paid off in full. She also excluded all debt from medical illnesses from the definition.
I would also add food and recurring monthly entertainment expenses to Suze’s list. Expenses such as going out to eat, cable TV, and the latest and greatest cell phones and cell phone plans should not be overlooked. If you are paying off this month’s meal three months from now you are probably living beyond your means. Similarly, if you can’t pay off your grocery bill each month, because you have an unlimited calling plan you are probably living beyond your means.
Investopedia expanded on the definition with the following five signs that you are living beyond your means:
- Your credit score is below 600. (Typically low credit scores are caused by having too much outstanding debt, failing to pay your debts on time and having balances that are too close to your credit limit.)
- You are saving less than 5%. (“A savings rate below 5% means you could be in real danger of financial ruin if someone in your family were to have a medical emergency, or your family home were to burn to the ground. With savings this low, it likely means you wouldn’t even have the money to pay the necessary insurance deductibles.”)
- Your credit card balances are rising. (This matches Suze’s sentiment. If you can’t pay off your credit card balance in full each month than the balance will rise as you pay minimum balances and incur outrageous interest and/or fees.)
- More than 28% of your income goes to your house. (“Why is 28% the magic number? Historically, conservative lenders have used the 28% threshold because their experience has told them that this is the rate at which the average person can get by, make their mortgage payments and still enjoy a reasonable standard of living.” The world has certainly seen the repercussions of high housing prices on today’s homeowners.)
- Your bills are spiraling out of control. (Small monthly bills like cable, cell phone, Internet and utilities can add up to a large sum of money. In order to pay these bills in full each month you may be putting other expenses like food and groceries on your credit card. If you can’t pay off your credit card each month than you may be living beyond your means.)
What do you think of the definition?