If you have debt, don’t be too hard on yourself. Living beyond your means is an easy trap to fall into. There are a ton of reasons why you may find yourself trapped with bills larger than you can truly afford to pay.
- You want your kids to go to the best schools – which are typically in more affluent neighborhoods – aka more expensive house and larger mortgage.
- You grew up within a certain socioeconomic status and you are accustomed to having certain things – a certain size house, perhaps a newer car, or elaborate vacations.
- You don’t want your kids to miss out on the things you had growing up.
- Or vice versa – you don’t want your kids to miss out like you did growing up when there wasn’t enough money to do certain things.
- Your ex has a new car or nice house and you’ll be damned if he’ll look like he’s doing better than you are after the break up.
- Your friends have a level of buying power higher than yours so you feel forced to keep up with them.
- You used to make more money, but due to a job loss, the economy, health issues, caring for a family member, or a career change – your income is lower.
But the thing is – you may want it, but you can’t afford it. This isn’t just about not being able to afford the money. You also can’t afford the health impacts due to the stress of not being able to pay your bills. You can’t afford to teach your children poor financial management and continue the cycle of living in debt. You can’t afford the toll it will take on your marriage. You simply can’t afford it.
What is debt?
You have to stop spending more than you make. Period. It’s a simple formula: Money In (income) – Money Out (bills) = must be positive! When it is negative, you are living beyond your means and accruing debt. To bring this point home even further, please consider the following scenario:
You are only spending $100 a month more than you make. You put this on your credit card which has a 20% interest rate. You continue this for 12 months until that raise you are counting on happens and you are breaking even. How much will this cost you long term?
Using the Credit Card Repayment Calculator from the Federal Reserve, if you make the minimum payments (remember you’re just now breaking even so you won’t have much more than minimum to pay) it will take you 14 years to pay off this debt and you’ll pay $2,168 in interest on top of the $1,200 you owed. OUCH! And that is only living beyond your means by $100 for a relatively short period of time. Imagine what it could be!
But it’s not hopeless. You can take control and I intend to help you. Every day this week I’ll cover a different aspect of reducing your spending to get back to living within your means. They’ll be helpful for anyone though – not just those with debt. Tomorrow’s topic is your income and how much cushion you should have between what you make and what you spend.
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