Professionals who realize something is wrong with their finances, but can’t pin down the problem, often contact me. Although they make a very good income, they are not accumulating wealth as rapidly as they feel they should. Or they feel at their current trajectory, they will not have enough savings to retire in the manner they are accustomed to living.
When we take a close look at their finances, we often find the main problem is they are living beyond their means. Their family expenses exceed what they should be spending on living a fun life and thus there is not enough left over to save for their future retirement, when they will no longer be producing an income and must rely on the money they set aside during their working years.
One of the most common areas to overspend is splurging on a big house in the suburbs. Once they become house poor, it is hard to recover without selling the house, and once they have moved in they refuse to sell.
Families who spend more than their income allows have many things in common. Most of them don’t realize these issues until after they have had them pointed out on paper. It is hard to argue when it is clearly seen in black and white. The following are common issues we find in spending plans. How many of these issues do you face?
No Emergency Fund
It is very important to always have money in reserve to help us through unexpected bad times. Although there is debate as to whether that amount should be 3, 6, or 12 month’s of living expenses, there certainly should not be zero dollars set aside for emergencies. Yet this is often the case.
When spending beyond your means, there is no leftover cash to put into an emergency fund. So, nothing gets saved. If the reason you don’t have an emergency fund is because you don’t have any available money to start funding it, then you are overspending. Make a budget that puts funds into your emergency fund each month before an emergency happens. The current California fire storm should be a wakeup call.
Not Tracking Spending
The most common reason I hear for not keeping track of spending is, “I don’t want to see how much I’m overspending.” They know they are overspending, but they convince themself if they don’t look, it will be alright.
One person I was working with made a preliminary budget and noticed right away that she was overspending. Immediately she quit the program. She said, “I see where this is going and I’m not willing to give up shopping so I’m out of here.”
She came to me because she was struggling to live on her income, yet she was not willing to make any changes in her habits to correct her overspending. One can’t expect to have different results without taking different actions. Tracking your spending will quickly reveal the areas where you are overspending.
Personal Debt is Growing
If you have more personal debt today than you had one year ago, you are overspending. Debt is a good barometer to see how you are doing with your spending. Personal debt only grows because you are spending money you don’t have, thus the need to borrow money.
When the government overspends their income, they “raise the debt ceiling.”
Unlike the government, we individuals can only borrow an amount of money that we can successfully make the payments on. When our debt is growing, there will come a point when we can’t make the payments and then trouble will come knocking. If your debt is growing, take immediate action to stop the process before you hear a knock on the door.
Not Tracking Net Worth
Most people who overspend do not want to track their net worth because they don’t want to see their wealth dropping. If you track it, it will grow. If you want your wealth to grow, keep an eye on the results. Otherwise, you will not know if what you are doing is working. You should be able to see your net worth grow every quarter. If it doesn’t grow, you should know why. You will not likely reach your financial goals if you are not tracking your progress.
Stressed Out About Money
If you have money stress, you are almost certainly overspending. Those who have money left over every month, or consistently see their bank account climbing, are rarely stressed about money. Those who overspend are constantly checking their accounts to see if there is still enough money to get them through to the end of the month. There should be no reason to check your bank account every day, but some do.
When you are living well within your means, you know there is enough money in the account. Some people see every dollar in their account as something that needs to be spent. Just because you have money in an account doesn’t mean you need to spend it.
Get your spending under control and you will never stress out about money again.
Borrowing Money from Friends or Family
Borrowing money is a sign that you are spending money you don’t have. If a bank won’t loan you the money you want, you are likely not in a position to be spending the money you are borrowing. Often, money borrowed from family and friends leads to trouble. I know this firsthand because I have been there. I have loaned money to both family and friends who were in a bad spot. Once I loaned them the money they needed, I never saw them again. For some reason, if they skip out on a loan, they seem to vanish from your life.
Making Payments on a Car
It is strange that making car payments has become the American way. “Buy the car you want, not the one you can afford, because we will lend you the money to do so.” If you must borrow money or use a lease to get a car, you can’t afford the car. There is a big difference between being able to afford the car and being able to afford the car payments.
There are people who haven’t lived a month of their adult life without having a car payment. It has become the norm for their automobile purchases. Break this norm and save the money you will need for your next car and pay cash for it. Stop the cycle of car payments. If you are unable to save money every month toward your next car, you are overspending your income.
Paying Overdraft Charges
I had one financial makeover client who paid two to five overdraft charges every month. They could easily have moved $5,000 from their savings to their checking account, kept the exact same poor spending habits, and would have saved more money in overdraft charges than their $5,000 was earning in interest in the savings account.
Overdraft charges stem from either not paying attention to spending or from overspending. If you have this problem, make the corrections you need today and stop paying overdraft fees.
Can’t Afford to Take Time Off
If you have ever sent your family on a vacation while you stayed home to earn the money to pay for it, you are overspending your income. You needed that vacation just as much as the rest of the family, if not more.
If your spending has put you in a position of not being able to take time off from work, you need to cut back on your spending until you have breathing room. This is a formula for burnout. You don’t want to end up in a position like one physician I know who was in a car accident. She returned to work sooner than her doctor advised because she was afraid if she missed any more shifts, she would not be able to make the house payment.
Not Maxing Out Retirement Plan Contributions
Almost everyone I see who doesn’t put the maximum amount of money into their retirement plans feel they need the money now to keep them afloat. This is a red flag for overspending. In fact, your overspending has reached a point where you are shooting yourself in the foot. This means you are not investing $1,000 into your future, instead you are paying taxes on the money in order to put $600 into your pocket today. Being willing to pay a $400 penalty so you can have an extra $600 to spend now is not a wise move. Get your spending under control and keep the $400 for your future self.
Bonus: Your Spouse MUST Work to Make Ends Meet
No highly paid professional should ever find themselves in a situation where two incomes are required to make ends meet. Every physician in every city should have no problem living on their income alone. If your spouse must work, it is because your family spends too much money. Even the lowest paid physicians earn at least 3X the average household income in America. If you can’t make it on that, you have a spending problem.
I’m not saying your spouse should not work, I’m saying they should not HAVE to work. Their choice to work should be an opportunity for them to do something they want to do. This is a great bonus to those married to a high earner.
I’m sure I ruffled some feathers with some of those issues. Please don’t write to me and tell me why you did one of these and in your special case it was a good thing. That is not what this article is about. These are signs of trouble. The more of them you have in your life, the more likely you are heading for a disaster. If you need help figuring out what to do, I have a program for that. If you have several of these issues, look closely at your spending and see if there are changes to be made so you can stop living beyond your means. If debt is an issue for you, please read my award winning book, The Doctors Guide to Eliminating Debt, before it is too late.
