Credit, Debt and Personal Finances 101 - Molen & Associates

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Credit, Debt and Personal Finances 101

In an era of credit cards, services that allow you to “buy now, pay later”, and access to loans at your fingertips, it is easy to indulge in lifestyle you can’t necessarily afford on your budget. Before your fall too deep down the rabbit hole – or if you may already be there, here are some signs you’re living beyond your means and some things you can do to escape the trap.

Living Paycheck to Paycheck

If your paycheck seems like its gone before it arrives and there is never any money left over for savings, this is a good indicator you are living beyond your means. We can often become so accustomed to a lifestyle and spending habits that it seems like there are no places to cut back. However, usually, if we take the time to examine our monthly spending habits, we’ll find that there are things that can be reduced or even cut out altogether. Things such as eating out too frequently or subscriptions that we don’t need or don’t use. Find these things and eliminate them to create some breathing room in your budget.

Using credit as a crutch instead of a tool

Credit cards can be a great tool on your journey of building good credit, but it can also be a sinkhole for a lot of people. Stray away from using credit as a crutch and relying on it to make purchases for things you don’t readily have funds available to pay for. If you find yourself carrying a balance from month to month and only making minimum payments it is likely you’re using your credit card as a crutch and living beyond your means as well.

Stressing about paying bills

With inflation on the rise and salaries remaining stagnant, buying the essentials and paying bills may feel more difficult than ever. Therefore, budgeting for these things is that much more important. If you find yourself constantly worried about how all your monthly expenses and bills will get paid, you likely have a spending leak that needs to be addressed. For more information on spending leaks and how to address them check out our other blog post ‘Plug Your Spending Leaks’.

Not being able to save

Another red flag that your finances are strained is that you have a hard time setting aside money for savings. Whether it be a savings account with your local bank or an investment account with a brokerage, you should strive to have your money working for you in the form of earning interest. Financial advisors recommend you budget at least 5% of your monthly income for savings/investing. If that finding the money to store away seems impossible, you’re likely living beyond your means and need to examine your monthly expenses to find places to cut back.

Not having an emergency fund

Investing is important for you financial wellbeing, but life can be unpredictable. Having funds readily available for unexpected expense like car trouble or medical bills are important. That said, you also want an emergency fund for unexpected expenses. Without one, an expected bill could cause significant damage to your pockets and your financial future. Financial advisors recommend having an emergency
fund that is at least 6 months of your yearly salary. If you don’t have an emergency fund or you’re struggling to grow one, you’re likely living beyond your means.

Not budgeting rent/mortgage properly

Financial advisors also recommend that your rent or mortgage not be more than 30-35% of your monthly income. Of course, the lower this expense the better. Depending on where you live, this can be challenging. However, having this bill be a lot more than a third of your income can make your budget feel depleted and could put your other financial obligations at risk. If you are suffering from a strained budget and your housing cost is more than 30-35% of your monthly income – this could be part of the problem.

Multiple Overdraft fees

One overdraft fee or non-sufficient funds charge isn’t really that large a deal – things happen. However, multiple charges throughout the year are a sign that your finances are strained, and you are not paying enough attention to how much money is being spent from your accounts. Monitoring your expenditure closer and setting “low balance” notifications can help eliminate these charges (which further deplete your income) and assist in getting your budget in order.

A dropping credit score

Your credit score is important. For most people it can be the deciding factor in buying their first home or purchasing their dream car. A drop to your score can be a clear sign there are underling issues involving your finances that needs to be addressed – almost like a check engine light for your finances.
Racking up debt and struggling to make on time payments will likely translate to a hit to your credit score. Worse, once the damage is done it can sometimes be difficult to repair. Take the time to examine your finances and make the necessary adjustments to improve your scores standing. Things like staying away from unnecessary debt, making payments on time, and staying diligent in reducing the debt you already have can help to maintain and rebuild your credit score. For free credit monitoring monitoring visit The site also offers insight on things you can do to better your credit score, and its free!

Large amounts of credit debt

All debt is not bad debt. Debt can be used as a tool to increase your cashflow while not tying up cash reserves. Bad debt is debt that does not increase your cashflows and has monthly payments that drains your budget.
If you have large amounts of bad debt that you do not have the plan or means to pay back, you have likely been living a lifestyle that’s beyond your means. When it comes to repaying debt, a good trick is to start with the loan or credit card that has the highest balance. Pay this one off first while making minimum payments on the rest. After you pay it off, add the newly available funds to the next highest and continue the process. If your overwhelmed by your debt you may need to seek professional help from a financial advisor to find out what all your options are.

Not Having a Budget

Not having a budget in place is one of the biggest mistakes you can make financially. Without a budget it is difficult to have a clear picture of your finances but also exactly where your money is going. It’s also hard to hold yourself accountable when you don’t know exactly what you’re doing wrong leading to overspending and putting financial obligations at risk.

Bottom Line

Living beyond your means is an easy trap to fall into and once your there its even easier to ignore the signs that you’re there.
Take the time to find patterns in your spending habits that aren’t suitable for your lifestyle. Then create a budget and stick to it. Having a budget will help you monitor your cashflows but also dictate spending habits, taking the anxiety out of making financial decisions. Lastly find ways to save. Store money away is important and your future self will thank you for it.
For more information regarding budgeting check out one of our other blog posts ‘Do I Need A Budget?’ and If you need any assistance in creating a budget or simply have questions about your taxes or tax planning call Molen and Associates today at 281-440-6279.

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