The phrase "living beyond your means" may conjure up the image of a motherly figure shaking her finger at you every time you consider pulling out your wallet to buy something you don't actually have the money to pay for yet. But are there ever instances in which spending money you don't have is actually OK?
You probably know you should keep a budget, track your spending, and only splurge on that vacation or night out when you've saved up the money for it in advance. But in reality, most of us are guilty of sticking that purchase on a credit card and waiting to worry about paying for it later. You are not alone. More than two-thirds of Americans have less than $1,000 in savings, according to a 2019 survey by GoBankingRates. And yet plenty of those Americans are still splurging on fashion, vacations, what have you.
So, how do you determine whether a splurge is a conscious decision that's worth it in the long run—or is simply part of involuntary lifestyle creep (aka slow, damaging, long-term living beyond your means)?
Establish your baseline
When you're considering whether you can make a purchase that isn't covered by the money currently in your checking account (or the cash in your hand), you should first acknowledge that is what you're doing. In other words: Create a controlled environment in which you are conscious of your spending decisions, so that you are first aware that you are making a purchase that exceeds your assets—and so that you are choosing wisely should you proceed.
Part of that awareness comes from building good habits, such as creating (and sticking to) a budget so you know roughly what you spend each month. Knowing how to set up and contribute to an emergency fund is also helpful. This way, you can stay on top of what you're spending and whether you are living beyond your means. Once you have a good sense of what flows in and out each month, you can make a determination about what purchases to make, if any, that might stretch your resources.
Some tell-tale signs of ongoing lifestyle creep include low credit scores, credit card balances that continue to accumulate, and if you are spending more than 28 percent on rent or mortgage, according to Investopedia.
Do a reality check
Of course, there are instances in which you don't have a choice but to spend beyond your means. Plumbing disasters, unforeseen medical expenses, emergency travel, or a utility payment that is higher than expected. We can't always account for every anticipated expense that might take us over the edge of our budgets, and sometimes it's necessary. That's why it's so important to have—and maintain—that emergency fund for just these kinds of unplanned, unavoidable expenses.
"When people think of 'spending beyond your means,' they usually think luxury purchases such as a vacation, fancy car, and expensive clothing," says Leona Edwards, CFP. And while "most people would agree spending beyond your means for these items is inadvisable...there are some instances where it might make sense to spend money you don't have," Edwards notes.
Investments in yourself and your future, such as paying for your education, job training, or spending towards a small business venture that may pay off down the line? Those are a few examples of "good debt"—when it's fair game to consider overextending your wallet, only temporarily, says Edwards.
Likewise, it's OK to consider spending beyond your means if you're facing an expense that may only grow worse if you don't pay—such as towards ongoing health, home, or auto issues, Edwards adds.
Steps to decide whether to spend
Once you've established your realistic financial landscape and the priority level for potential wallet-busting transactions, there are some additional important considerations, according to Edwards.
Ask yourself what you hope to get out of the purchase.
Will it lead to a more lucrative outcome, potentially, or just put you into greater debt with yet another [fill in the blank thing you feel compelled to buy] that you don't really need?
Identify how you plan to pay.
Are you thinking of sticking it on a credit card versus taking out a loan versus some other method? Thinking through the "how" is an important factor that could impact your decision to move forward with the "what."
Plan your timetable for paying the money back.
"If it's just a few weeks and you have the available credit on your card, it would probably be OK to use it and just pay it off the next time your bill is due," Edwards says. "If it's going to be a longer-term debt, a student loan, or getting a zero percent interest credit card—if you qualify for one—could be your best option."
Speak with a financial advisor.
Whether or not you're planning a major purchase you can't immediately afford, enlisting the help of a financial advisor in your money planning is never a bad idea, as they can help you weigh all your options from an informed place.
Ask yourself: Is this something I really need to do?
Then, ask yourself: Do I need to do it now? Or can I do some planning instead? Edwards explains that maybe that vacation is calling you, but rather than book it now on the credit card, you could save a little each month and book it a few months down the line.
"A repair or a health event probably needs to be addressed ASAP. But you might be able to wait a little longer on making a purchase for your business or going back to school while you save up or explore additional resources," she says.
Ultimately, you are the arbiter of your finances and are capable of making decisions about when, or if, to spend your money—including money you might not have right now.