If you are like most Americans with their finances, and you don’t remain vigilant, it isn’t always the easiest thing in the world to know if you are living outside of what you can afford or not. You probably have large unavoidable expenses like most of us do. Think mortgage payments, rent, or insurance each month. If you do not do a deep dive or even a medium dive into your finances, it’s easy to let your spending get out of control and spiral you into unrecoverable debt quickly. That’s why we’ve compiled a document of the 5 biggest warning signs that you might be digging your debt grave. If these apply to you, it’s time to sit down and reflect on your finances and how to proceed from here. Here are the top 5 signs…
This is red flag number one. Although credit cards are largely marketed as a tool for buying things you can’t afford right now; the truth is that they should almost never be used in that way. The best way to use a credit card is to buy things on it and pay them off entirely at the end of the month. This builds you credit by proving financial trustworthiness, and gains you rewards. Ideally you should be making money from the use of credit cards.
By paying only the minimum payments on your debt, you are digging a huge debt hole for yourself extremely quickly. Oftentimes, depending on how much you owe, the minimum payment doesn’t even cover the interest you owe that month. This leads to you owing more and more each month instead of slowly paying off your debt. Not to mention the interest rates on credit cards are typically absurd, ranging above 20% in most cases. If you are just paying the minimum, it might be a better idea for you to not continue to use credit cards in the future.
Do you have an emergency fund? Finance professionals all recommend that you should have an emergency fund consisting of 6 month’s (minimum) of your average family expenses. This is to protect you in the off chance you lose a job, have a medical issue, or anything else happens that prevents you from working for money. If you don’t have this saved up, you should start tucking cash away for this immediately. If you don’t have an emergency fund, AND you don’t have any savings at all, that’s a huge red flag.
Having to pick and choose what bill you can pay this week or this month is another huge red flag. If you can’t afford to pay all of your bills each month, you’re in big, big trouble. What would happen if you had an emergency, as mentioned above, that put you out of work for the next four to six months? How would you and your family get by?
This is a long mentioned “golden rule” by financial experts. Not counting your mortgage, if your debts are above 20% of what you take home each month then you are possible going to run into issues down the road. Take home pay is what you actually “take home” to your bank account each month. Meaning your pay, minus any taxes.
Obviously we cant cover every red flag out there in one article. We’re just trying to strike a chord with those who fall under some of this more obvious red flags. Some more examples will be listed here. For example, using your credit card to pay for things you need but can’t afford. Refinancing your loans to add years and increase interest but lower your monthly payment. Needing to find someone to co-sign on loans. Having an auto-loan for more than 5 years. Getting turned down for debt consolidation requests. Having more than 5 credit cards. The list goes on.
If any of these relates to you, you might want to rethink how you are approaching your finances.
You’ve been digging yourself into a hole. Depending on how long you’ve been digging, it will take a long time to get out of. The first and most important thing you can do is to stop digging. No need to get yourself in any deeper than you already have. The next best thing you can do is to look into a debt consolidation service. Rolling your debt into one bill can help with organization, and oftentimes you can find a low interest line of credit to dump it all onto. As long as you pay off the debt before that interest goes up, you’re golden. Another obvious thing you need to do is to start spending less.
Maybe get rid of the data on your cell phone plan. Lose the cable television at home. Replace expensive services with cheaper ones; for example, replacing cable with Netflix. Making simple changes like this can make a word of difference in the long run. Hundreds of dollars a month saved adds up quickly over time. Now go forth, and get out of debt!