Too Much Debt?
Obvious Signs of Disaster
By Daniel Muniz

It is easy to know when you are in the hole with your finances. After all, money is tight and you don’t seem to be getting anywhere with your bills. However, there are obvious signs that you may be in over your head with too much debt. Here is how to identify if you are heading towards financial disaster.

But before examining your financial situation, the first thing you have to do is to examine your financial honesty.

Perhaps the worst mistake that people who are saddled with too much debt make is refusing to accept the harsh reality of their finances. Yes, they already know that they are struggling to pay their bills but they have yet to make the radical adjustments that are needed in their budgets. They just keep putting a band-aid on a problem even though they are financially hemorrhaging. However, the only way to fix a problem is to accept the bitter truth that one actually exists. And the only way to do that is to honestly evaluate the circumstances in your life.
 

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So if you say “yes” to half or more of these signs, then you have serious money problems:

Sign 1. You cannot pay the full outstanding amount on all of your credit cards at the end of each month.
Credit cards should only serve two purposes; convenience and emergencies. If you are using plastic or a line of credit as an alternate source of income, then you are ruining your finances. Only the federal government can spend money it doesn’t have (and it’s doing a lousy job on paying it back), therefore, you have to live within your means. Sadly, millions of people simply think of revolving accounts as another form of income and spend it as such.

There are exceptions and emergencies such as a car repair or other unexpected incidents are good examples. Also, department stores sometimes have “zero interest” offers on large purchases. However, it is only a bargain if you can pay it off in the allotted time. If not, you will be socked with outrageous compounded interest.

Sign 2. One or more (or all) of your credit cards are maxed out.
Regrettably, a maxed out revolving account is the result of Sign 1 taken to its logical conclusion. Emergencies should be the only exception to this rule so if your card is maxed out, then you have been living outside of your means. And to add insult to injury, the compounding interest on revolving credit is viciously piling on more debt because you are no longer paying off the original amount but all the subsequent interest that continuously grows alongside with it.

Sign 3. You are bouncing checks several times a year.
Everybody bounces checks at one time or another but when it happens more than a few times a year, you got problems. A non-sufficient funds fee eats into your already strained income making whatever money you have left even less available to pay off bills. But more importantly, someone who is living paycheck to paycheck should not be bouncing checks. This is an expense that is completely avoidable and it has to be when money is tight.

Sign 4. You are using cash advances to pay for ordinary expenses.
This is the best sign that demonstrates that you are living outside of your means because you are now using revolving credit as an alternate source of income, which will ultimately lead to a “maxed out” credit card. And worst of all, this habit is a ticking time bomb because the point will finally arrive when there is no more money to pull out.

Sign 5. Your “maxed” credit card is “always” maxed out.
The purpose of making monthly payments to a creditor is to eventually bring an outstanding balance down to zero. However, the cruelest trap a consumer can fall into is making a payment to a maxed out account and then spending (or doing a cash advance) on the newly available credit line. Not only does this revolving account turn into a never-ending bill, you have ceased to service the principal because you are now only paying the interest.

Sign 6. The monthly payment on an installment loan (like a car loan) is becoming increasingly difficult to pay.
You know that this fixed amount is due on the same day of every month but you are struggling to pay it because extraneous expenses are eating up your income. It is not as though a monthly payment is an unexpected bill like a car repair, so if you are having difficulty making an ordinary payment, you got problems.

Sign 7. You are paying the same bill late more than once a year.
If you are low in cash, then it is a no-brainer that you are going to be paying some if not all of your bills late. The problem is that late fees are making a bad financial situation even worse because you now have to spend more money to cover that additional surcharge. But the worst outcome is if you resigned yourself to the notion that you are always going to be paying late fees because you are never going to be on time with your bills.

Sign 8. You have no emergency fund or savings account.
If you have no way to cover an emergency or an unexpected expense like a home or car repair or a medical bill because all of your credit cards are maxed out and you don’t have any reserve cash available, then you have reached the surest sign that you are in over your head with debt. In addition to death and taxes, unexpected expenses are the next surest thing in life so you have to have some kind of escape hatch. And that’s why it is so important to save credit cards for emergencies because the unexpected is practically guaranteed to happen.

As a result, you need to have an emergency fund or a savings account (or as a last resort, a credit card with almost its entire credit limit available to spend). It sounds ironic to actually set money aside when you are drowning in debt but its purpose is not for the bills at hand, but solely for emergencies.

Summary
If you have experienced half or most of these signs, then you are in deep financial trouble. However, financial honesty is perhaps the most important step in digging yourself out of debt. Too many people simply struggle with their bills and delay the inevitable instead of dealing with their money problems head on. But the longer you wait, the closer you are for everything blowing up in your face.

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