Common Warning Signs of Impending Financial Disaster

Overwhelming debt doesn't happen overnight. Usually it's a gradual process caused by constant overspending and poor money management skills. If you are living from paycheck to paycheck, only pay the minimum amounts on credit card bills, have no workable budget, and don't have a clue where your money is going every month (you just know it runs out), a serious financial disaster may be just around the corner.

Knowing the warning signs of financial trouble may help you avoid it. Here are some common characteristics displayed by people who are flirting with danger when it comes to their finances.

1. You consider your home as a source of money. One of the major causes of the financial meltdown which started in 2007 was homeowners who borrowed against the equity in their homes. When the housing market was booming, people were encouraged to take out "home-equity" loans to pay for things like flat-screen TVs, new cars, and dream vacations. Unfortunately when the market crashed, many homeowners were left with mortgages that were underwater- meaning the appraised value of their property was less than what they owed to the mortgage company (plus they still had to pay off the home-equity loan). Financially-speaking, it's rarely a good idea to create long-term debt. Never think of your home as your personal bank.

2. You are tapping into your retirement accounts to pay expenses. Borrowing from your 401(k) is a serious red flag that you shouldn't ignore. People tend to do this only as a last resort but it is not a solution to your cash flow problems. Accessing funds from these accounts also has serious tax implications. You would be better off cutting back your lifestyle and selling everything you don't truly need.

3. You fight with your partner/spouse over money issues. Constant fighting about financial issues is one of the fastest ways to ruin a relationship. It also is a sign that a financial crash may be about to happen. All couples have occasional arguments about money. But if you are experiencing continual, never-ending disagreements over your finances, it may be time to seek both financial and marriage counseling.

4. You're paying overdraft fees and bouncing checks. If you are paying overdraft fees, non-sufficient fund fees, or other penalties assessed by your bank, this is a clear indication that you are in serious financial trouble. It's a warning sign that screams "too little income" and "too many expenses". Consider professional credit counseling to help get you through this financial turmoil. Ignoring the situation will only make matters worse.

5. You're playing credit card roulette. Savvy consumers know how to use credit cards to their advantage. If you can earn reward points with your purchases and always pay off the entire balance each month, using credit cards is not a problem. However, if you consistently charge everyday purchases such as groceries and gas and only pay the minimum amount due every month, you're on very shaky financial ground. Your credit card balances will continue to rise and you will be paying higher interest charges. The typical household in America who has credit cards carries an average outstanding debt of over $15,000. If you are moving credit card balances from one card to another trying to reduce your debt, you are fighting a losing battle. The harsh reality is that you need to put away the credit cards, use cash to pay for purchases, drastically reduce your living expenses, and seriously adjust your spending habits.

6. You are getting hit with late fees and juggling your bills. If you have trouble paying your bills in a timely manner and constantly incur late fees, this is definitely a sign that you're in deep financial trouble. When your monthly income is less than your monthly living expenses, it's doesn't take a financial genius to know that at some point your cash flow situation is going to implode. Living from paycheck to paycheck is no one's idea of fun. Plus it never allows you to get ahead. Unless you substantially increase your monthly income or greatly decrease your living expenses, the chances of getting out of this "cycle of debt" are slim and none.

7. You're depending on a future windfall. Everyone likes to think they will win the lottery or hit it big in Las Vegas. But the odds are very much against it. If your financial decisions are based on the prospect of inheriting some money or property or getting a big bonus at work, you are really setting yourself up for a huge financial fall. The past few years have shown just how quickly retirement funds, job security, and high-paying positions can be diminished or disappear altogether. Getting your financial house in order takes perseverance, determination, and making decisions based on reality, not wishful thinking.

8. You have little or no savings. If you are unable to put aside even a small amount of money each month, your financial situation is precarious at best. Every budget should include a certain amount of money to be put into savings on a regular basis. Without an emergency fund, an unexpected financial need such as a car repair or new water heater can spell financial disaster. With no significant savings, your dreams of enjoying a secure retirement, funding your child's (children's) college education, and being financially independent are virtually impossible to achieve. Get in the habit of "paying yourself first" - start saving now.
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