Long before the bill collectors start to call, the signs are everywhere. Are you paying attention?
Financial crises don't typically happen overnight.
The seeds are usually planted at least months and often years before bankruptcy, eviction, repossession, foreclosure or other disasters ruin people's financial lives. Recognizing -- and correcting -- risky money behaviors is key if you want to avoid derailing your finances.
Here are some of the biggest red flags to watch out for:
You're surprised by your bank balance or credit card statements. In today's financial world, you can't be caught napping. "Float" -- the time it takes a transaction to clear your account -- has all but disappeared, and financial services are eager to penalize any lapses, such as a bounced check or an over-limit transaction, with hefty fees. At the very least, you need online access to your financial accounts, and you need to check them often -- at least once a week, more often if you've bounced a check or incurred any other fine in the past six months. Personal finance software like Money or Quicken can help you keep track of pending transactions and forecast your cash flow.
You have no savings. You don't necessarily have to keep thousands of dollars stuffed away somewhere, but you do need some kind of financial cushion to cover unpredictable expenses.
You're carrying credit card debt. Don't fall for the myth that credit card debt is normal or that the average American carries huge balances. In reality, most U.S. households have no credit card debt, according to the Federal Reserve.
Credit card debt not only costs you ridiculous amounts of interest, but it drastically reduces your financial flexibility, since any balance you've charged is credit you can't access in an emergency. If you've got balances on your plastic, make paying them off a priority.
Take a hard look at the real choices
You have no discretionary income. If every paycheck is spent before you get it, or your fixed expenses eat up most or all of your income, you need to fix the problem, now. You may have convinced yourself that you have no choices, but chances are good that you do; you just haven't been willing to really consider them yet.
You don't know what kind of mortgage you have or when the payment resets. One out of three homeowners, when asked what kind of mortgage they had, confessed to pollster GfK Roper that they had no idea. Unless you have a traditional mortgage -- with a fixed rate for the life of the loan -- your ignorance could be expensive. The payment that's currently affordable could skyrocket, leaving you among the rising numbers of homeowners losing their homes to foreclosure.
Call your lender now to find out whether and when your payment can change, and get an estimate of how high it can go; then consider your options. You may be able to cut other costs to compensate for the bigger payment, or you may want to explore refinancing or even moving.
You're underinsured. If your job doesn't provide adequate health insurance, you need to look for another job. In the meantime, read "A survival guide for the uninsured." Also check the liability limits on your auto, home and/or renters policies. Liability coverage protects you if you get sued; if your policy limits aren't high enough, you risk losing much of what you own plus big chunks of your future income. Make sure the limits are at least equal to your net worth (what you own, minus what you owe). Finally, if you're a homeowner, read "Is your home underinsured? 8 key points" and adjust your coverage limits if necessary.
Your business (or rental property) is losing money. As a fellow business owner, I understand how much you want your venture to succeed. But too many months of red ink will sink not only your business but your personal finances as well, especially if you're using your personal credit or savings to stay afloat. Come up with a plan to fix the problem and set a (relatively short) deadline; if your business isn't generating positive cash flow by that deadline, pull the plug.
Face the facts
You're ignoring an elephant. This catch-all refers to any big, ongoing money problem you're consciously avoiding or pretending doesn't exist. Maybe you've got a car payment you're struggling to pay (read "The real reason you're broke"). Or you've got adult kids (or parents) constantly turning to you for financial help (read "Should parents bail out their adult kids?" or "Should you bail out your parents?"). Or you're retired and your nest egg is shrinking faster than you'd planned (read "Retire on a wounded portfolio").
Whatever the problem, you need to assess the toll it's taking and find a solution before you're backed into a financial corner.
Speaking of corners, any of the following are good indications you're already in one:
You're borrowing from one lender to pay another. This includes using cash from one credit card to pay another, but it also includes tapping your home equity to pay off credit card debts if you don't have a plan for avoiding credit card debt in the future.
You've missed a payment on any loan. Skipping a payment, or failing to pay the minimum specified, is a very big deal. Missing even a single payment can knock 100 points off your credit scores and trigger higher interest payments on your credit cards. Fall much further behind and you could face collection actions, lawsuits, repossession (if you're late on a car) and foreclosure. Don't wait until things get awful; fix them while they're still just bad.
You've taken out a payday loan. The payday loan industry would love you to believe that borrowing money at triple-digit interest rates is a normal and reasonable thing to do. It's neither. If you're borrowing from payday lenders, your financial house is on fire and you need emergency help. A legitimate credit counseling agency (one associated with the National Foundation for Credit Counseling, for example) can provide budgeting help as well as debt repayment plans.
