Debt is that unpleasant part of our finances that we would all like to ignore or pretend that it is under control. Very often, this attitude leads to a situation where a problem that could have been solved with less pain now requires a much more severe intervention. How do you prevent the situation from getting to a point where the harm to your finances can be so significant that it can take years to recover and put all your goals at risks? Here are some warning signs that you should watch out in different aspects of your financial life and take corrective action to redeem the debt situation.
Gaps in your Safety Net
Emergency fund and insurance are the two primary defences that you create against any threat to your financial security. But when you find that your emergency fund has become less of a fund to meet unplanned or emergency expenses and more of a cushion to bridge regular shortfalls in your income, then it is a sign that your defences are being breached.
Similarly, when you decide that insurance premiums are a wasteful expenditure and you don’t really need a cover, you may be putting income security at risk. If you have stopped paying premiums or are postponing the decision to take the insurance you need, whether life, health, motor or product warranties, because you don’t think that your income can bear the cost, then you need to check where the income is going.
Very often, debt may be draining the income and leaving you exposed to the risk of being unable to meet your needs and goals.
Stagnating and declining Wealth
A house, car, consumer durables, jewellery, investments and other such assets may fulfil your desire to acquire assets but whether they make you wealthy and give you financial security is another matter.
Your net worth is a measure of your wealth since it takes not only your assets but also your liabilities into consideration. A positive, rising net worth is a sign of growing wealth. On the other hand, a declining or negative net worth is a trigger for you to investigate where things are going wrong.
If the assets have been procured with debt then the improvement in your net worth may be limited till the assets appreciate in value. The impact on net worth will be negative if the assets acquired are those that lose value with time. An upward trend in outstanding debt, whether from additional debt taken or on account of interest and penalty on unpaid balances, signals stress on net worth.
Another factor that will pull down your net worth is when your investments reduce or stagnate as you either draw on investments already made to meet expenses and debt obligations or you find yourself unable to meet savings and investment targets because your income may be going towards repaying existing debt, leaving no surplus to save and invest.
Money Transaction Clues
When you are unable to pay your bills on time or are unable to pay them at all, then check if your debt obligations are draining your income, leaving insufficient funds to pay current bills and expenses.
Another repayment behaviour that you need to watch out for is when you are forced to juggle creditors for repayment because you are unable to satisfy all claims each month. If you are denied credit facilities or the interest that you have to pay on a loan is prohibitively high, then it should serve as a warning that the debt you are carrying is seen as excessive and that puts you at risk of being unable to meet important and emergency situations where you may require to borrow funds. Keep track of your credit score; a declining score will serve as a warning.
Misusing Products and Facilities
When you find yourself using financial products other than how they were intended to be used, it may indicate financial stress that you need to get to the root of. For example, the way you use and settle your credit card obligations is an indicator of how badly you are enmeshed in debt. When you max out the credit available on your credit cards or use a card even when you have pending dues on it, or, when you can only pay the minimum due on the credit card and are forced to pay exorbitant interest costs, you are in debt trouble.
When you redeem long-term products such as equity investments or withdraw from the emergency fund to meet current expenses or debt obligations, you put long-term goals and financial security at risk. Another wrong decision you make that can cost you significantly more in the future is to postpone essential expenses such as those related to health or maintenance of house, vehicle and other assets because your income and emergency fund is inadequate. All these are cues for you to investigate the cause for the mismatch between income and obligations.
The Emotional Toll
Being in debt puts an emotional toll on you too. You may worry constantly on how to pay your bills, or the lack of savings makes you insecure about the future, or the effort required to get out of debt may make you anxious and any temporary setbacks in a debt reduction plan that you may have adopted may be cause for depression.
Or, you may be at the other end of the spectrum and go into denial about your debt situation. This would include pretending that you are taking care of debt by just paying the minimum amount due, ignoring bills and other dues and rationalising debt and expenses.
Either way you need to start dealing with the debt problem to get back on track financially and emotionally. The steps for this would be to first take stock of each and every item of debt that you have and put in place a plan for repayment within a fixed time frame. You will need a strict budget to help you find the savings and set milestones. Be prepared to face failures once in a while. But keep your focus on the goals and take encouragement as you reach each short milestone. And keep your antennae up to catch the signals that may tell you that you are going off-rail once again.