Avoiding Financial Distress

Avoiding Financial Distress PDF

No matter where we stand financially, failing to take proper precautions can lead to stressful situations. Often, it's a series of small actions that help us withstand unexpected financial challenges. The ideal time to put these safeguards in place is when your finances are strong.

What are important moves to make to help protect us from money stress?
Build strong cash buffers with an emergency fund covering at least 6 months and have sinking funds for those irregular but predictable costs like insurance premiums and holidays. Finally, right size your financial commitments with housing costs under 30% of gross income and all fixed costs under 50% of take home pay monthly.

Can debt strategies help prevent financial distress?
Target your debt-to-income ratio to be under 36% of gross income and avoid building high interest debt if possible. It is also smart to refinance or consolidate whenever you can lower your interest rate and not overly extend your payoff term. Debt can be overly burdensome if your income is ever reduced or is paused.

What are a few moves that help with catastrophic issues?
First and foremost, make sure you have the right insurance—life, disability, auto, and home or renters—to protect against unexpected events. Also be sure to maintain your employability by keeping up to date with skills and certifications as well as building experiences with your employer.

Are there any early warning signs to be aware of?
On a monthly basis be sure to review your cash flow and net worth trends. These can be early signs of money stress building. There are several red flags including rising credit card balances, overdrafts, late or missed payments and using BNPL (buy now pay later) for essentials. Rapidly shrinking savings may be an early indicator of impending financial difficulties.