People have long spoken of “haves” and “have-nots, ” but perhaps never in modern times has the economy seemed so separated between those who seem to be getting ahead and those who are falling behind.
What complicates things is that appearances can be deceptive. The easy availability of debt can make a household believe it is living well when in fact it is working itself into trouble. Failure to put money toward certain responsibilities can also boost a lifestyle in the short term but leave you facing a big bill in the long term.
So, to help look past that kind of illusion, the following are nine questions that will help you determine whether you are getting ahead or falling behind:
- Does your income exceed your expenses? Credit is often so easy to obtain that your lifestyle really does not reflect whether you are getting ahead or falling behind. Don’t confuse getting ahead with simply getting the things that you want. If you are relying on debt to fuel your lifestyle, you are falling behind because you won’t be able to afford that lifestyle indefinitely.
- Have you identified how your expenses will grow over time? For the reasons discussed above, living within your means is an important first step toward getting ahead, but you need to anticipate that it may become more difficult as your expenses grow. Things like having kids, going back to school, or moving to a more expensive neighborhood may represent higher expenses on the horizon, as might any variable rate debt, from credit cards to adjustable-rate mortgages.
- Is your debt heading toward zero, or infinity? Debt is definitely one of those aspects of financial life in which people are usually either getting ahead or falling behind, with little middle ground in between. It is not enough to be slowly chipping away at debt, because interest expense is always trying to build it back up. Similarly, continually tapping into home equity means you just keep taking on more interest expense. If your debt is not on track to reach zero within the foreseeable future, you are not really getting ahead.
- Are you building your assets? Getting ahead means that the net value of your assets is growing. This includes home equity, savings, retirement funds, etc. Alternatively, people who are falling behind may have assets, but their value is diminishing because they are spending against that value.
- Do you save in advance for big ticket items? Certainly, you can borrow to make big purchases like a new car, but that means your subsequent income will be offset by the amount of your loan payments. In other words, you may acquire an asset now, but your budget going forward will be reduced. If you save up in advance, when you acquire the asset your budget going forward will be free and clear of such payments.
- How well do you maintain expensive resources? Speaking of cars, things like cars and homes will last much longer if you maintain them properly. In a sense, that type of maintenance helps you get ahead, because it prolongs the useful life of your assets. In contrast, if you use things roughly, you will face a shorter repair or replacement cycle that will cost you more in the long run.
- Are you taking care of your health? You can think of your health as similar to the type of maintenance mentioned above. If you are healthy, you will be able to work longer and earn more. If not, you face diminished earnings and higher healthcare expenses.
- Is your retirement saving on track to fund your needs? An important aspect of retirement planning is to try to fund your life style once you are no longer working. If you cannot do that, you are effectively falling behind because you face a drop-off in lifestyle in the future.
- Are you managing your career successfully? Working hard, keeping your skills up to date, and generally being valuable to your employer and in demand on the job market are all things that could affect your future earnings. If you are not putting a sincere effort into your career, you may be falling behind because it is eroding your future earning power.
Obviously, wealth and income have a lot to do with determining who society’s haves and have-nots are, and not everyone is in a position to control those things. However, how you manage what you do have also matters a great deal, because plenty of rich people have blown their fortunes, while people of modest means have managed to keep their finances on course. So, whether or not you are getting ahead or falling behind is not so much a question of what you have now as one of which direction your finances are heading.