The danger of spending more than you make

Too many people across the globe are spending more than they make. This, coupled with a decline in personal savings rates, is having a devastating effect on individuals who continue to live beyond their means. Now is the time to begin to spend less than you make and secure your financial future.


Step 1: Check your credit score


Credit reports are drawn up by credit bureaus. The information used to compile these reports is supplied by credit providers, usually every 30 days. The most important part of the credit report is the payment profile or account history which typically spans a 24-month period and shows all the accounts that you pay in full and on time, along with late or skipped payments.


Defaults that are more than three months in arrears and where the credit provider has noted that a consumer is in default, are also reflected on the report. Defaults can be noted even if there is no legal action pending against the defaulted consumer. The report also records where an individual has applied for credit and how often in the past 24 months, and any judgements against them.


You should check your credit report regularly to make sure that they are an accurate reflection of how you manage your debt. Consumers are allowed to request a free credit report from each of the credit bureaus every year. There are three credit bureaus able to supply these reports: TransUnion, Equifax and Experian.


It isn’t only credit providers that access an individual’s credit report – employers, insurance companies and potential landlords will use this information to make a decision about whether to give a person a job or extend insurance to them.


Step 2: Know exactly what you spend


Use an online spreadsheet or even good old-fashioned pen and paper will do. Note down your net income after tax and all deductions for retirement annuities or an unemployment fund. Now, list all your monthly expenses. Don’t forget to include the interest you pay on any credit extended to you. Next, list annual expenses for vehicle licencing, school fees, annual card fees and so on.


Remember to make allowance for annual payment increases. Check your bank statements to determine the likely increases you can expect on insurance, rent or interest rate fluctuations.


Step 3: Change your mind-set


Now, with a comprehensive picture of your income and expenses in front of you, comb through each expense and mark with an “N” for need, or a “W” for want. All those items and expenses you cannot live without (licences, food, mortgage or rental, education costs, insurance) should get an “N”. Eating out in restaurants, extra shoes or clothing, the larger TV or weekend away, are wants and belong in the “W” column.


Now’s the time to get tough. If you want to secure financial freedom for yourself and your family in the long-term, you will need to commit to cutting as many items from the “W” column as you possibly can. Get creative. Instead of eating out in restaurants, pack a picnic and head for the beach. Find clever ways to cut your grocery bill and cut back on clothing purchases that might speak to your ego but will wreck your bank balance.


Decide, today, that peace of mind and the feeling you get from living within your means and securing your family’s financial future, far outweigh a temporary retail high.


Step 4: Start saving


Having cut as many ‘wants’ from your expenses as possible, add up the total savings. Aim to save at least 10% of your gross income (before deductions). Use the ‘pay yourself first’ principle. This means, that before you pay any other expenses, you first put that 10%, or more, into an interest bearing account that will grow your money savings to keep up with inflation.


Most financial experts agree, that if you save less than 5% of your gross income each month, you’re in over your head and will not be able to keep up with inflation or financial emergencies.


Remember, a ‘cash loan provider like wonga should be used only in emergencies when to leave an expense (like fixing a burst pipe in your home or getting your car back on the road) could cost you additional expense if left unattended.


Step 5: Choose the right house


What is the roof over your head costing you? If the answer is: more than 28% of your gross income – you’re living beyond your means. Why 28%? Historically, the experience of conservative lenders is that this is the rate at which the average person can get by, make their mortgage payments and still enjoy a reasonable standard of living. Just as you have done with all your other expenses, apply the ‘want’ versus ‘need’ test to this expense.