If you are living paycheck to paycheck and consistently spending more than you earn, you are likely to be living beyond your means. If this carries on for an extended period of time, you can get yourself in financial difficulties and struggle to cope if you are faced with unexpected expenses.
In this article we look at the warning signs that you could be over-stretching yourself and give you pointers on how to manage your finances more efficiently.
You couldn't live 3-6 months without your income
There are always financial emergencies that arise when they are least welcome, but these are less of a problem if you have built up an emergency fund. The amount of the fund should be 3-6 months' worth of income and this should be enough to cushion you against any financial surprises - even losing your job. Building this emergency fund will not be easy if you have limited spare money every month, but putting just a small amount away each month will quickly build up.
Read our article "Building an Emergency Fund - the what, why and how" to find out more.
You don't live within a budget
Living without a budget is like driving with your eyes closed - you can't see where you're going. Having a budget allows you to understand your income and outgoings, and plan for purchases without resorting to credit. A lot of people are afraid of creating a budget plan as they are scared of what they might uncover, but this is actually making matters worse and maybe even driving them deeper into debt.
Budgeting is easier than ever thanks to a new wave of budgeting apps that can help to categorise your spending and identify wasteful subscriptions. Check out our article "The best budgeting apps in the UK - how to budget without even trying" or download our free budget planner.
You only pay the minimum off your credit card each month
Although credit card companies specify a minimum amount you have to repay each month, if you fall into the trap of only paying that amount, you will end up paying considerably more in interest. In extreme cases, you can ultimately pay more in interest than the amount you borrowed in the first place. Moreover, paying the minimum and extending the length of time you are paying off the debt can have a detrimental effect on your credit rating.
You use Buy Now, Pay Later services
While Buy Now, Pay Later (BNPL) is growing in popularity and can be useful in some situations, if you are frequently opting to pay in instalments with providers such as Klarna, Laybuy or Clearpay, it is an indicator you may not be handling your finances efficiently. If you can't afford to pay for something upfront, you need to assess whether it is a good idea to make the purchase, particularly if it is a non-essential item.
Evidence suggests it is easy to build up unmanageable debts with BNPL, with the repayments for several, relatively inexpensive items soon mounting up. Debt charities report a significant increase in the number of people coming to them having fallen behind with BNPL payments. This is intensified if your financial situation changes before the end of your repayment schedule.
You have paid your bank an overdraft fee in the last 12 months
If you are regularly paying overdraft fees, then you are just throwing money down the drain. Using a budget, as detailed above, will help you take control of your spending and stop you from paying your hard-earned cash to your bank. Check your bank statements for the last 12 months and add up how much money you have paid your bank in unnecessary charges or, even better, use a budgeting app, such as Emma, as it will add up all of your bank charges automatically for you.
You are paying for a holiday using credit
You probably justify this by saying that you deserve a holiday because you work so hard. Whilst this is probably very true, using credit to buy your two weeks in the sun is madness.
Let's face it - holidays are a luxury, so they should be paid for from 'savings' otherwise you will still be paying for this year's holiday when next year's holiday comes around. Of course, there is nothing wrong with paying for a holiday with a credit card to protect yourself under Section 75 of the Consumer Credit Act should anything go wrong (e.g. the airline goes bust), but make sure that you clear the debt at the end of the month. Also, using a credit card could encourage you to buy a more expensive holiday than you would have done using your hard-earned cash.
You are in debt but pay someone else to do a job you could do yourself
Washing your car, cleaning the house and ironing are all jobs that most people hate, so getting someone else to do these tasks is very tempting. However, if you're in debt, then these are luxuries you cannot afford. Calculate the annual cost of these outgoings, then do them yourself and use the money to pay down your debts. Or better still, go and do some of those jobs for other people and earn extra money. You can't be too proud if you're determined to take control of your finances.