This particular financial behavior is by far one of the most prominent causes of financial ruin.
This behavior can lead to divorce, depression, alcohol/drug abuse, foreclosure, and it can even lead to fatalities in the form of suicide.
On July 28, 2017, the New York Post published a tragic story of a broke Manhattan Chiropractor and his wife who jumped to their death from the 9th floor of an office building. The husband and wife were 53 and 50 years of age respectively. Suicide notes were found in the pockets of both spouses describing how they could no longer live with their financial reality.
Forbes published a piece in 2014 detailing a study conducted by the University of Oxford that identified more than 10,000 suicides linked to financial crisis throughout the U.S., Canada, and Europe. This is a global epidemic that is oftentimes overlooked and can prove to be fatal when the symptoms of this particular behavior are not treated in the early stages.
This detrimental behavior is known as Living Above Your Means.
Living above your means is essentially the act of spending more money than what is coming in. For example, you are living above your means if you generate $10,000 of monthly income and spend $10,200. You are living above your means when you are continuing to eat out when you have at least one bill that is past due. If you pay only the minimum due on your credit card balance you are most likely living above your means. If you cannot live for 6 months without your paycheck you are living above your means. If you are unable to save at least 10% of your earnings you are living above your means.
"Think Before You Spend"
There are four prime elements of destruction that living above your means will lead to.
1) Plummet Your Net Worth
Far too many people fail to place any focus on their net worth. Net worth ultimately determines how wealthy you are from a financial perspective, and calculating your net worth is fairly simple.
[The value of what you own minus the value of what you owe is your net worth.]
Maintaining awareness of your net worth is a strong deterrent against living above your means. Incorporate annual goals for your net worth and turn it into a personal challenge to reach that goal by year-end. Visualize the euphoric feeling that will pulsate through your veins once you meet that goal.
You work hard to meet and exceed the annual financial goals placed upon you by your employer, so why not work just as hard on your own personal financial statement?
"No one can ever take care of you better than yourself."
2) Destroys Your Credit
Living above your means will eventually force you to become dependent on credit to finance your lifestyle.
On April 17, 2017, creditsesame.com published a story of a mother who drove herself off a cliff and fell 400 feet to her death due to financial depression. This mother/wife was caught up in a vicious cycle of writing bad checks, running up credit cards, taking out payday loans and telling lies to her husband about her spending habits. Her cost of living was high because of high-interest rates induced by bad credit, and she had to take any job she could get, to include janitorial work. It became so bad that she ultimately decided to drive off a cliff to end it all.
This is yet another case of how living above your means led to someone committing suicide. I know that this is extreme, but I want to emphasize just how severe this behavior can be. Bad credit eliminates your ability to purchase a home, take advantage of low-interest rates, among many other things.
The desire for instant gratification is usually the motive that leads to bad credit behavior. Build a financial game-plan and be patient until you are financially healthy enough to comfortably afford the things that your heart desires without over-extending yourself above your means.
3) Pushes Out Your Retirement
Too many of us fail to plan for retirement early on in our careers. Oftentimes we wait until we are only a few years away from retirement before we seriously start thinking about it.
Then we say to ourselves, "oh boy, I sure do wish that I had started planning for retirement twenty or so years ago. Maybe then I would not have been living above my means all this time. I barely have any savings in the bank and my 401k will not be nearly enough to sustain me on its own if I stop working in a few years. What the hell am I going to do now?"
This is what living above your means will do to you, and it is very frightening to even think about. Having a retirement plan in place with clearly defined goals embedded within it will serve as another strong deterrent against living above your means. Furthermore, it is a good practice to revisit and review your retirement plans at least several times per year in order to continuously instill the discipline of refraining from living above your means.
4) Destroys Your Ability to Build Wealth
Those who live above their means are usually just barely treading water, living paycheck to paycheck, and only one or two financial emergencies away from completely drowning.
Living above your means completely destroys your ability to build wealth because your assets are continuously shrinking while your liabilities are continuously growing. You will clearly see this trend by closely monitoring your net worth tracker from month to month. In the sense of wealth building, living above your means is quite frankly going backward instead of forward.
The most basic requirement for building wealth is to NOT live above your means.
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Disclaimer: Hudson Wealth Management, LLC (HWM) is a FINRA registered investment adviser firm. Investing in securities involves risks, and there is always the potential of losing money when you invest in securities. Before investing, consider your investment objectives and HWM's fee schedule. The information provided herein is for illustrative purposes only and does not constitute personalized investment advice, recommendations or solicitations to hold, buy or sell any investment or security of any kind. All images and return figures shown are for illustrative purposes only and are not actual customer or model returns. Past performance does not guarantee future results.
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