Tuesday, October 13, 2020

Financial Warning Signs

I recently saw the headline Five warning signs you are in over your head financially, by Pattie Lovett-Reid.  I saw it as an opportunity to learn more about how to help people avoid financial trouble.

Here is a summary of her list of warning signs:

  1. You are ignoring your finances.
  2. Your finances are giving you a lot of anxiety.
  3. As soon as you get paid, all of your money is spoken for, with the majority of it going to debt service.
  4. Your creditors are calling non-stop.
  5. You are borrowing from Peter to pay Paul.

I was expecting warning signs that you’re headed in a bad direction, but these seem to be signs that you’re already in serious trouble that will be difficult to fix.  In a similar vein, here are my warning signs that you’ve got health problems.

  1. Most of your blood is on the ground.
  2. You haven’t breathed in a few days.
  3. You’ve been cremated.

My point is that I was hoping for more subtle signs that your finances are heading in the wrong direction.  Catching the problem earlier makes it easier to fix.

Let’s go through some more early warning signs of potential financial problems.

You didn’t pay off all of your credit cards in full last month.

Does this mean all is lost?  Not at all.  It’s just a sign that you’re headed in the wrong direction.  If you’re on a trip and make a wrong turn, all you need to do is turn around; your trip isn’t ruined.

Suppose this is the first time you haven’t paid off your card in full.  The appropriate response is to make a plan to get it paid off.  Look for some way to reduce other spending until you’ve eliminated the credit card debt.

You don’t have any quick access to emergency funds without adding new debt.

If you don’t have an emergency fund, you’ll be fine as long as nothing bad ever happens.  Of course, bad things do happen, such as cars needing repairs, health expenses, etc.  Going further into debt for each of these problems is a formula for eventual bankruptcy.

Don’t despair if you have no emergency savings.  Just start saving a little at a time.  When you have enough of a cushion, stop adding to it.  If you ever have to dip into it, start adding to it a little at a time again.

You are about to sign a many year commitment to big payments.

This is most common when buying cars or houses that are too expensive, but there are other cases.  For example, an insurance salesperson might try to sell you on some complicated mix of life insurance and investments.  As long as you make the big monthly payments for decades, you’ll get millions in your retirement.  But what happens if you can’t make the payments at some point?  The answer is that you’ll lose the car, house, or retirement.  Make sure the payments you commit to are reasonable, even if you end up facing big changes in your life.

I’d be interested to hear about more early warning signs of personal financial trouble.  The idea is that the warning should come early enough to be able to solve the problem without too much pain.

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