• We all have to spend money to live, but how much is too much?
  • The exact amount of money you should be spending is highly personal and depends on your lifestyle, but there are a few red flags that indicate you’re headed in the wrong direction.
  • Generally, if you buy things to keep up with your friends, budget based on your pretax salary, or aren’t saving anything, you’re probably overspending.
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If you want to end up wealthy one day, it’s crucial to keep your spending in check. Many millionaires say the greatest secret to building wealth is living below your means.

How much of your income you should spend versus save or invest depends on the lifestyle you want to live now and in the future, as well as your personal financial goals. Still, there are a few red flags that indicate you’re spending more than you can afford.

Here are seven signs you may be overspending:

1. Your budget is based on your salary or hourly rate

Foto: sourceREUTERS/Jim Bourg

You probably have a nice, round number attached to your job title, whether it’s an annual salary or an hourly rate, but that’s not what you’re actually bringing home. After Uncle Sam takes his share of taxes and the state you live in takes its own share, you’re probably left with less than you think.

If you budget your money based on your pretax number and not the amount that ends up in your pocket, you're likely overestimating how much you can afford to spend. Use a simple online calculator to find your take-home pay and go from there.

2. Your expenses exceed your income

Foto: sourceFlickr/Tim Pierce

Life can be costly, but the key to achieving financial stability is having more money coming in than going out.

When you list all of your monthly fixed and variable expenses - from rent to food to your gym membership - the sum should not exceed your monthly income. If it does and you don't cut back somewhere, you may end up in debt.

Managing cash flow can be tough for people with inconsistent income, such as contractors or freelancers. Try finding your income baseline - either the average of your income for the last 12 months or, to be extra safe, your worst-earning month - and use that to decide your limit for expenses.

3. You have a negative net worth

Foto: sourceREUTERS/Lt. Matthew Hertzfeld/Toledo Fire and Rescue/Handout via Reuters

When your expenses exceed your income for too long, you may end up with a negative net worth - what you owe is greater than what you own.

If you find yourself in the hole, you're not alone. The Federal Reserve Bank of New York reported in 2016 that about 15% of US households have net worth equal to zero or less.

If you think it could take longer than five years to repay your debts, you may consider filing for bankruptcy to provide some relief, Debt.org advises. However, not all types of debt are forgiven in bankruptcy and it can affect your ability to borrow money in the future. Devising a debt repayment plan, with or without the help of a financial planner, may be better option.

4. You carry a balance on your credit card

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Using a credit card for all or most of your purchases is perfectly fine, as long as you are able to pay off the balance in full every month. If you don't, or you simply make the minimum payment, the remaining balance will begin to accrue interest and grow exponentially.

Credit-card debt doesn't mean you're doomed, but it's a surefire sign that you're spending (or spent) money you don't actually have.

5. Your rent or mortgage exceeds 30% of after-tax income

Foto: sourceAP

The standard measure of housing affordability in the US is 30% of pretax income. For example, someone with an annual salary of $50,000 should ideally spend less than $1,250 a month on housing costs. But that doesn't factor in taxes.

A more helpful way to gauge whether you're overspending on housing is to try and limit your monthly expenses to 30% of your after-tax income. This can be tough to manage in a high cost-of-living city, but it's a good benchmark to aim for. Use an online calculator to estimate your take-home pay, multiply that by 30%, and divide by 12 to get your target number.

6. You buy things to keep up with or impress your friends

Foto: sourceoneinchpunch/Shutterstock

If you're buying a ticket to every festival or joining every happy hour because that's what your friends are doing, it may be a sign you're spending more than you can afford.

Social media exacerbates the "Keeping up with the Joneses" affliction many of us suffer from. You probably don't know the financial situation of each of your friends and assuming you can afford something because they can - or worse, you're trying to impress them - isn't a sustainable strategy.

7. You aren't saving at all

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Saving for retirement and big expenses should always be a part of your budget. Maybe you've convinced yourself you can't save because you don't make enough money or your rent is too high, but chances are you're simply spending too much.

Use an app like Mint or Personal Capital to take a hard look at where your money is going every month, and choose one or more things to cut back on or eliminate all together. Then, put that same amount of money into a savings account. You have more control over your expenses than you may realize.