My friend had a stable job making $85,000 a year with moderate debt that included a mixture of credit cards and student loans. He lived a comfortable lifestyle often eating at fine restaurants and traveling. He shared with me that has all changed.
My friend who was never late on bill payments was now facing some financial issues. He shared his stress from the creditors’ phone calls. “It came out of nowhere,” he states, ” I thought I was managing my money very well.”
For many people making $85,000 a year would be a financial windfall but my friend was living a dark secret. He was living paycheck-to-paycheck. He held onto a belief he was always going to make more money. My friend, like many people I’ve met, have shared how their spending habits didn’t need to be controlled because they could afford the purchases, bills and credit payments. He was ill-prepared for the unexpected that one traffic ticket would send him off to the financial abyss.
There are many of us at one point in our lives that have gone through a financial meltdown. We didn’t have an emergency fund so we dipped into long-term savings. We’ve forgotten to pay a bill on time even if was just a few days later. We’ve paid more on fees and financing charges than we’ve saved.
So are there warning signs that we’re headed for financial trouble?
My friend never saw the red flags during those blissful years of “financial indulgence.”
Here are ten financial warning signs that might indicate you are headed into financial trouble. Why is it important to know these signs? Because knowledge of your actual situation creates a drive to resolve them.
10 Signs You’re Headed into Financial Trouble
1. You associate savings with purchases and not with a savings account. Buying things at a discount is good purchase management but not saving money for short, mid and long-term goals can mean disaster.
2. You don’t know how much debt you have. The biggest hurdle preventing many from achieving financial freedom is not knowing the total amount of debt owed.
3. You have credit cards that are near or above the limit. You make the minimum payment in order to charge on the credit card’s new available balance.
4. You make late payments on bills or paid a checking or debit card overdraft fee. This is an early sign you may be losing control of your money.
5. You carry a revolving balance on your credit cards. Holding balances on credit cards month-to-month can lower your credit score. Thirty-percent of your credit score is derived from your credit usage (the ratio of used credit to available credit).
6. You use credit card checks or cash advances to pay your bills. These credit card features cost money from extra fees or higher interest charges. It may seem convenient but can add to your debt load.
7. You were turned down for a credit card or loan. This may be an indication that lenders find you a high-risk borrower showing you may have overextended yourself. Credit scores used to determine your creditworthiness is a tool creditors use to determine the potential risk of default or bankruptcy in a few year.
8. You borrow money from your 401K to pay for monthly expenses. Your 401(k) is part of your long-term savings strategy used for retirement and not to pay for debt or recurring monthly expenses. A 401(k) loan or withdrawal can mean penalties, fees and impact your returns.
9. You believe the lottery is your path to retirement. You have a higher chance of being struck by lightning than winning the lottery jackpot. Your retirement should include a robust savings and investing plan that includes 401K contributions, IRAs, brokerage accounts and life insurance.
10. You hide your financial situation from your partner. Money can erode the strongest bonds among partners causing arguments and divorce. Lying about your spending habits and hiding bill statements will cause more grief down the road.
If you find yourself agreeing to a few of these, it may be about time to sit down and assess your financial situation completely. The first step in preventing a financial meltdown is to figure out if you may be on that path.
In order to create a solution, you’ll need to acknowledge your actual situation. You can begin bypulling your credit report from AnnualCreditReport.com, learn what your credit score is by using free services like CreditSesame. Then, start the budgeting process that will help you uncover how and where you are spending your money. There is a solution for everything and it’s just a matter of accepting where you are today. Then, it’s about the time and initiative in creating a plan and taking control.
Live the life you want to live but you need to make sure it is affordable. If it isn’t affordable then you might want to consider a different lifestyle or figure out ways to afford that lifestyle. You may need to create a plan to focus on debt repayment for the next year, find ways to supplement your income or invest time to increase your skills to get a higher paying job or promotion.