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Debt Warning Signs

Smart Money Planning: 5 Debt Warning Signs to Watch for

Turns out you don’t need the repo man to haul off your car to be in debt trouble. You usually pay your bills right before the due date. You have just enough available balance to cover the unexpected. You haven’t heard from a bill collector in ages, if ever. No problem, right?

Well, if you aren’t paying close attention to how much you owe, you may, indeed, be walking on the ragged edge. What are some of the warning signs of a debt problem? Here’s a list of five. Even one of these warrants a better financial plan.

You Can’t Afford to Miss These Debt Warning Signs

1. You have no idea how much you owe.

If you can make all of your credit card and loan payments, you may convince yourself that you have no debt problem. But as the number gradually increases, you stop keeping tabs. If you don’t know how indebted you are, this could be your wake-up call.

Acknowledge that the number is higher than you want it to be. After all, no one wants to be in debt. So, get brave and add it up. Not only does it benefit you to know how much you owe, but you should also know how much you are paying in interest charges each month. When you have this information, you can formulate a plan.

2. Your bills total more than 20 percent of your pay.

Ideally, you should pay off your credit card each month. Who does that? Around 50 percent of Canadians it seems. If you, however, are in the other 50 percent, you need to make sure that you have sufficient remaining income to meet your monthly living expenses. You also need savings to ensure that you can handle an emergency.

If your minimum payments exceed 20 percent of your net pay, i.e., after taxes, you should look for ways to pay down your debt. Remember, too, that making minimum payments will keep you in debt indefinitely. So, as you pay off one bill, put the money toward another. In addition to reducing your debt, you’ll want to get into the habit of paying yourself right off the top. Put money in a savings account. Without money in savings, any little catastrophe will have you running up your credit card balance again.

3. You spend more money than you make.

At first, you may exceed your income by just a little. Then it starts to be a little more in a lot of places. Slowly but surely, your debt grows, and your savings shrink. Put some hard numbers to your spending by pulling up your credit card and bank statements for the past month.

How much did you spend between your credit card and loan payments, your housing, food, fuel, and every expense you can recall? How many times did you hit up the ATM for cash? Did your spending include a luxe leather jacket you couldn’t pass up, an alcohol-infused night with friends at the latest hotspot, or an emergency car repair?

Compare your income and your expenditures. Did your credit card balance grow, or did you pull money from savings? Today, Canadians are over $2 trillion in debt. Many are less than one missed paycheck away from insolvency. Your credit card and your savings can provide a cushion against the unexpected. But, not if you use them for random splurges.

4. You have taken a cash advance on your credit card to pay a bill.

This may provide a short-term fix and keep the debt collectors at bay. But it’s definitely not a good idea. The interest rate on a cash advance is typically 3, 5, and up to11 percentage points higher than for purchases. Also, there’s no grace period. So, you start accruing interest immediately. Beyond the interest rates, there is typically a fee of 3 to 5 percent, and there can be a minimum amount. So, for a $20 cash advance, you could pay a minimum $10 fee right off the bat.

If you used the money for living expenses, this is a big indication that you are spending more than you make. If you used the money to make a minimum payment to another creditor, you increased one debt to pay the interest charges on another. Either case is not a good one.

5. Your credit card company reduced your limit.

It’s a little-known fact that credit card companies can reduce your limit at any time. It’s in the fine print of your credit card agreement. You know, the paper printed with legalese in the microscopic font.

This can happen for several reasons, even if you are using your card responsibly. It can also occur if you are only making the minimum payment and the total credit line usage has crept up. You may suddenly appear to be not a safe credit risk for the company.

Not only is this infuriating, but it can also leave you without the credit you are depending on. But, if you are, in fact, depending on your credit card to make ends meet, this is a blessing in disguise. It’s an early debt warning sign.

What to Do About Debt Warning Signs

Most experts agree: The best remedy against these warning signs is to put together a budget. That way, you’ll know exactly how much money is coming in and how much is going out.

Start by writing down how much you owe each creditor. Look at your statements and note how much of your typical monthly payment is going to interest. It’s not enough to simply look at interest rates. Look at the actual amount of interest you are paying.

If you hadn’t noticed it before, it may shock you, and, possibly even mobilize you, to do something about it. That bedroom furniture you thought was such a deal at $2,000? At the minimum monthly payment, you’ll pay for it twice over the next ten years.

It doesn’t have to be this way. To put together a realistic budget, you’ll need to track your expenses over the month. Once you have the information you need, you can put your spending in categories, such as housing, utilities, food, clothing, etc.

You may be surprised at how much you are spending without thinking. Look for areas where the changes don’t matter so much and progress from there. Not everyone is willing to give up, for example, their gym membership. You may not have to. Figure out what’s essential and what you can let go. Put money in savings each month, even if it’s only a few dollars.

Do what you can to mitigate the debt warning signs. If it is apparent that you do not actually have enough money each month to meet your financial obligations, you may want to speak to a Licensed Insolvency Trustee. A Trustee can help you formulate a plan and evaluate your options.

John Adamson, CPA, CMA

John is a Licensed Insolvency Trustee (1994), a Chartered Insolvency and Restructuring Professional (CIRP – 1994), and a Chartered Professional Accountant with a Certified Management Accounting designation (CPA, CMA – 1992). His experience includes more than 25 years of helping individuals, small businesses, their owners and even lenders, find solutions to their debt problems.

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