Are you… Living Beyond your Means?

by Kristy Como Armand

With worries about the economy at the forefront of everyone’s concerns, many are taking a closer look at the state of their personal finances. 

According to the U.S. Bureau of Economic Analysis, many people in America are living beyond their means, and personal savings rates are at their lowest levels in nearly two decades. Dwindling savings mean that U.S. households are taking on more debt and are less able to absorb a financial blow like the loss of a job, a downturn in the economy or a natural disaster like the hurricanes we have experienced in Southwest Louisiana. If you are unsure about the stability of your finances, Twenda Hanson, Vice President with Lakeside Bank, says there are some key warning signs to monitor. “Just as our national economy is monitored by indicators, there are certain signals in your home economy that can let you know if you are getting in over your head.”   

Hanson says any of the following situations should signal a “red alert” on your personal finances.  “Awareness can help you diagnose and correct the problem before it gets worse and you really put your financial well-being at risk.”

Your Credit Score is Below 600
Credit bureaus keep track of your payment history, outstanding loan balances and legal judgments against you. They then use this information to compile a credit score that reflects your credit worthiness. The numerical rankings go from a low of 300 to high of 850, and Hanson says the higher your score, the more confident you can feel about your financial stability. “These computerized, three-digit measurements of credit-worthiness influence not only whether or not you’ll be granted credit, but also how much you may pay in interest and other fees for a credit card or a house or car loan. In addition, today many non-lenders, including future employers, check that information as well. In general, any credit score below 600 means that you are probably on shaky financial footing.” If you aren’t sure what your credit score is, get a copy to find out.  She says to review it carefully for errors and work to raise your score.

You Aren’t Saving 

The average rate of personal savings is 2.4 %, according to the U.S. Bureau of Economic Analysis. That means that Americans spend nearly everything they earn. “If you save less than 5% of your gross income, you are likely in over your head,” says Hanson. “This means you could be in real danger of financial ruin if you lost your job, someone in your family were to have a medical emergency, or a disaster struck your family home. With savings this low, it likely means you wouldn’t even have the money to pay the necessary insurance deductibles. And you certainly aren’t building a nest egg for a secure retirement.”

Ideally, Hanson says everyone should try to save as much as they can, but in terms of targets, the rule most financial experts suggest is 10% of your gross income. “If saving that much is not feasible, save as much as you can, working to increase the amount you set aside as your income increases and you minimize expenses. What’s most important is that you make saving a priority and contribute to savings consistently.”

Your Credit Card Balances are Rising
If you keep a high balance on your credit card (or cards), paying only the minimum due on your balance each month, then you are headed for financial problems – if you aren’t there already. “Your goal should be to only charge what you’ll be able to pay off at the end of each month,” says Hanson. “And if you can’t afford to pay off the balance in its entirety, you should try to at least pay more than the minimum, making some contribution toward the outstanding principal.” She says the importance of paying down credit card balances as soon as possible cannot be overstated. A person with $5,000 in credit card debt who makes the minimum payment of just $200 per month will end up spending more than $8,000 and take almost 13 years to pay off that debt.

Home Mortgage
Calculate what percentage of your monthly income goes toward your mortgage, property taxes and insurance. If it’s more than 28% of your gross income, Hanson says this could put a big strain on your finances. The 28% threshold is often used as a guideline because research has shown this to be the rate at which the average person can make their mortgage payments and still enjoy a reasonable standard of living. “Certainly, some homeowners can get by spending a higher percentage on their homes, particularly if they cut back elsewhere, but it will take discipline and an interruption in income could spell financial disaster.”

Bills are Piling Up
Buying on credit and paying by installment has become the American way. It’s much easier to buy a new flat screen television, swimming pool or furniture set when the salesman breaks down the price in monthly installments. What’s an extra $50 per month, right? Hanson says the problem is that small bills add up, and the total can lead to major financial problems. “If you feel overwhelmed by your monthly bills, it’s time to take stock of the big picture. Go through your bills one by one and decide whether each product or service you are paying for is really necessary. Some of the best places to find savings include utility bills, cell phone plans and entertainment expenses.

Hanson stresses that these warning signs do not mean you are teetering on the brink of financial disaster but should instead be viewed as symptoms of a problem that needs attention. “If one or more of them apply to you, it’s time to reevaluate your spending and saving habits and implement a long-term financial plan. Recognizing the problem is always the first step to finding a solution.”