Three Signs You’re Spending More Than You Can Afford—and How to Fix It

Dipping into your savings to pay the rent? Afraid to look at the balance on your credit card statement? Here’s how to spot and fix money problems before they become a financial nightmare.

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Aug 2 2018, 3:42pm

Illustration by Daniel Zender

A booming economy and strong job market has the Trump administration touting big wins for Americans. But not everyone is winning. In fact, many lower income workers are falling further behind.

Glowing economic headlines don’t reflect the financial realities of less affluent Americans who have born the brunt of wage stagnation by wiping out their savings and getting into more debt. “The bottom 60 percent of income-earners have accounted for most of the rise in spending over the past two years even as the their finances worsened,” Reuters recently reported.

A few signs that all is not well for most Americans include past due credit card bills at their highest rate in six years and personal savings rates far below their pre-financial crisis levels. Mortgage and auto loan delinquencies rose during the first quarter of 2018 too.

“The big issue for the U.S. is not a lack of [economic] growth but of course the growing income inequality and the share of that growth that is accruing to capital holders as opposed to labor,” Bruce Sacerdote, a Dartmouth College economist, said. His 2017 working paper published by the National Bureau of Economic Research found that spending growth by Americans in the bottom 50th percentile of earnings has outpaced their income growth for the past 50 years by a factor of more than two to one.

In some cases, economic optimism can actually push people to spend more than they can afford—a big mistake if you’re already living paycheck to paycheck. “None of your spending should be based on the economy or what anyone else is doing for that matter,” said J. Money, personal finance blogger at Budgets are Sexy. “Your money is separate from everyone else's, and if you don't treat it as such you'll end up living their lives instead of your own.”

To figure out if you’re among the millions of Americans getting carried away with their spending because the economy seems to be doing so well, it’s wise to do a gut check on your personal money habits. Here are three red flags:

You’re paying overdraft fees on the regular

The occasional “oops” happens to everyone, but if you're always paying overdraft fees—at an average of $33 a pop—you’re probably spending more than you should. And make no mistake, banks are cashing in on this common mistake to the tune of $15 billion in 2016, according to the Consumer Financial Protection Bureau.

How to fix it: Set up automatic reminders when your balance drops below a certain amount to avoid overdrawing and make sure to install your bank’s app on your phone so you can keep an eye on your cash flow and steer clear of these avoidable charges that are depleting your savings.

Another approach is not to opt in for overdraft protection in the first place. This is a risky strategy though since some banks, including Bank of America, will slap you with another fee—called the non-sufficient fund fee—for overdrawing in the first place. However, if you have a bank like Chime or Simple that simply declines your purchase without charging you a fee, you can avoid ever paying an overdraft charge again.

You're digging into your savings to pay regular monthly bills

You used to be able to pay the rent, utilities, and any credit card bills with cash to spare each month, but now you’re sneaking $500 or even $1,000 at a time to cover essentials. That's a sign that either your expenses have gone way up or you’ve got a budgeting problem.

How to fix it: Look at your spending and see where you are overdoing it. “Track every expense for the next 30 days. It'll not only have you double-thinking all those purchases you’re about to make, but by the end of it you should know a lot more about your patterns than you even realized,” J.Money said.

Going out three times a week because it’s summer? Try rolling it back to once a week. Overspending on fancy hotels on vacation? For your next getaway, make sure to comparison shop before you book and remember you can usually cancel a room reservation for free if you find something cheaper a few days before your scheduled arrival.

Once you’ve gotten your spending under control, work on building up your savings. Set up automatic transfers from your checking to savings account—even $10 or $20 a month helps. Also, consider adding to an account that's harder to dip into. “Bump up your 401(k) contributions,” J. Money said. “You can't spend money if it's taken away from you first, so bump it up a couple of percentage points and that way no matter what else you do you're at least banking money towards those future goals.”

You can’t afford to pay off your credit card bill in full each month

Sure, you're in good company—two out of five Americans have carried a credit card balance for at least the last two years, CNBC reported—but not paying off your credit card bill in full is costing you big time. Even $6,000 in debt results in more than $1,000 in interest charges in just one year, with the current average credit card interest rate of 17 percent.

How to fix it: You need a strategy to tackle your debt. If you have multiple cards, try paying off the smallest balance first and work up to paying off the highest, a tactic known as the debt snowball. The idea is that the small wins will help build momentum and motivate you to keep going. If you can’t afford to pay off everything, it’s time to go back to your budget and look for ways to save, consider a side gig bring in more income, or find a way to give yourself a raise.