7 Red Flags Of Financial Trouble
Dear Rich Lifer,
Lately, we’ve been hearing more stories like this:
Here I am sitting in my kitchen having to decide which bill to pay: our mortgage or the car insurance. My husband was recently laid off for the second time since the pandemic started. Our savings are shrinking and bills keep piling up. What should we do?
The pandemic is stretching a lot of people thin and forcing many to turn to credit or personal loans to cover basic living expenses.
But having to go into debt to cover fixed monthly expenses is a major red flag.
Three years ago, Bankrate found that 57% of Americans did not have enough money in their bank account to write a $500 check in case of an emergency.
With 11 million Americans still unemployed, and the threat of a second wave of lockdowns looming, it’s safe to say that that Bankrate number is growing.
But it’s not always easy to tell when you’re in financial trouble. If you only ever pay with cash, you know when things get tight. Intuitively, you can feel the pressure.
But when you pay with credit cards and take on debt, things become less clear. Every time you swipe your credit card, you don’t feel that same pinch as when you hand over a $10 bill.
This distorted perception of your financial reality can quickly spiral out of control if unchecked.
Here are seven warning signs you may be in over your head…and what you can do to get back on track.
Red Flag #1 – You Avoid Opening Bills
If bills keep piling up or email statements are left unopened in your inbox, this is a sign you’re struggling.
Psychologically, it’s easier to bury our heads in the sand than deal with the problem at hand. But the ostrich approach will leave you broke.
You need to take a deep breath and deal with reality. Open every bill you have been putting off and prioritize which ones need to be paid first or which ones you owe the most. Then call whoever you owe money to and explain your situation.
Most creditors will offer debt relief and be willing to figure out a payment plan that works for you since they would rather get paid something than nothing and have you file for bankruptcy.
Red Flag #2 – You Only Make Minimum Payments
In a pinch, paying only the minimum balance is acceptable. But if this becomes the norm every month, you need to take a hard look at your finances.
By only chipping away at your debt in small amounts, you’ll stay stuck in revolving debt month-to-month while interest racks up. To break this cycle, you need to first set up automatic payments to avoid missing any due dates. Second, begin setting aside more money to take down your debt faster.
If all you can afford are minimum payments, you need to slash some expenses or consider finding a second job or side hustle (like this) to bring in more income.
Red Flag #3 – You’re Paying Off Debt With More Debt
As tempting as balance transfer offers may seem, they can leave you in more debt than when you started if you don’t have a plan like we’ll outline in a second.
A major red flag that you’re in financial trouble is if you’re constantly transferring outstanding balances or refinancing your home to pay down debts. It might seem like a good idea at the time, especially with lower interest rates. But using home equity and lines of credit to pay off debt has a high potential to end in disaster.
Instead, figure out what is causing your debt in the first place. Are you buying things you can’t afford? Are you overpaying for things like car insurance or cell phone plans?
Once you address these issues, if you’re still in debt, put your fixed loan payments on autopay and organize your debt with a clear end goal. When will you pay off all your debt? Set a date. Then call your creditors and try to negotiate lower rates.
If you don’t get the answer you wanted the first call, try again. It might take a few calls.
Red Flag #4 – You’re Constantly In Overdraft
Even if you have overdraft protection, you should not be regularly having to use it. What is the real problem? Are you not transferring enough into your checking account to cover your expenses? Or have your expenses increased and you haven’t realized it?
Create a household budget so you know how much you need to have in your bank account to cover monthly expenses. If an unexpected expense arises, be proactive and either transfer more money into your checking account to cover it or charge the expense to your credit card.
Red Flag #5 – You Say to Yourself “Just This One Time”
We all know when we do something we know we shouldn’t. If you do something like tap into your 401(k) early or take out a cash advance, and justify it by telling yourself “just this one time,” you’re playing with fire.
Justifying bad money decisions is a slippery slope. There’s no solution other than to simply not do it. If you know it’s the wrong decision, don’t risk it.
Red Flag #6 – Your Savings Are Shrinking
If you’re able to pay all your expenses every month but you’re having to tap into your savings to do so, there’s a problem. Picture your savings with a trend line. If every month your savings balance goes up or stays the same, that’s a positive trend.
If your savings start to go down because you’re having to cover fixed expenses, you’re trending downward. If that’s the case, it’s time to rethink your budget and reassess your monthly expenses.
Red Flag #7 – Your Debts Are Affecting Your Personal Relationships
Are you hiding bills from your spouse? Or keeping your partner in the dark about how bad the debt has become?
Hiding the problem isn’t going to help solve it any faster. Instead, you’ll place unnecessary pressure on yourself which can manifest in other marital and personal problems.
Talk to your partner about the situation you’re both in and figure out a household budget that tackles the root causes of your debt problems. You’re in this together so why not work together to solve the issue.
Who knows, maybe your spouse has retired early and would actually like to pick up some part time work, especially if it would relieve some of the financial stress? You won’t know until you talk it out.
Facing your financial woes is never easy, but it’s critical to address any problems before they spiral out of control. Keep these red flags in mind as you navigate these next few months.
To a Richer Life,
The Rich Life Roadmap Team