For most people in a financial crisis, their crisis didn’t happen overnight. Usually there are warning signs even 2 – 3 years in advance pointing to the impending financial troubles. Knowing these signs can help you detect potential problems earlier and hopefully help you avoid or at less minimize the financial difficulties.
Where should someone look first for warning signs?
The first area to review is the amount of debt, specifically credit card debt. If your credit card balances are growing month to month and have been for last 6 months this is warning sign that you are heading towards trouble. You are definitely spending more than you are earning and using your credit card to fund the difference.
Does paying only the minimum on your credit cards indicate a problem?
Yes, if you have been paying only the minimum for over 6 months and your balance is growing during that time line. This is a strong indication you are spending more than you are making and this is a quick way to get into a dire financial circumstance. Plus, because of the interest accumulating on your credit card balances, your debt will grow exponentially causing and even deeper financial crisis. This is how people get in very difficult situations so quickly.
What is another warning sign that one is head towards financial issues?
Related to the rising credit card debt - if one is starting to open additional credit cards because they have maxed out their current accounts is a telling sign that financial trouble is looming in the very near future. Another variation is to use store charge cards, which if one is not careful, can spiral out of control. If you have monthly payments on more than 5 credit or store charge cards, you could be heading quickly to tough financial times.
What could be a less subtle sign of coming financial concerns?
Tapping your emergency fund every month just to be able to pay your monthly bills is one. This is a clear sign that you are spending more than you are making. Depleting your emergency fund for non-emergency expenses creates a situation that when you have a real emergency – car repairs, water heater replacement, medical, etc – you won’t have funds available and then will be forced to add to your debt.
What are other signs of being financially overextended?
Cutting back or stopping savings activities, especially if stopping 401k contributions. Needing extra cash in one’s monthly cash flow is a sign that expenses are growing faster than income and this is a situation that if not corrected leads financial troubles very quickly.
What is a sign that is often overlooked?
A situation that needs to be monitored is using the buy now pay later financing options. Having too much of this type of debt could create a situation that when all the monthly payments come due a person couldn’t make all the monthly payment minimums.
Recognizing the warning signs that you are not on the correct financial path is a key element in avoiding financial crisis. Early detection allows you to make changes that will be easier and your road to recovery will be much faster.
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Categories: Finances, Money Matters