Debt: The Warning Signs And What To Do
Most of us find we're in debt at some point during our lives. But how much is too much debt? And what can you do if you realise you're in trouble?
Whatever you might think about consumer debt, there's little doubt that it's been `normalised' in recent years.
The rise of credit cards has meant that more people have easy-access to debt than ever before. Up until last year, massive mortgages were readily available to home-buyers with small (or non-existent) deposits. In addition, thousands of young people sign up for student loans every year -- but also end up using bank overdrafts and credit cards to keep them afloat while they study.
You could say that, as a nation, we're adrift on a sea of debt. So how are you supposed to know when you're starting to sink?
But I'm just about managing.
If you just about manage to keep your head above water each month, you probably feel you don't have a debt problem.
Of course, only individuals know the finer detail of their own situations -- but I'd say that if the struggle to keep on top of your finances is a significant, and constant, effort, perhaps you're fighting a bigger battle than you realise.
In this article, I explained that a shocking number of adults are dangerously in the dark about their debts.
Here, I want to outline what I see as some of the warning signs that debts could be spiralling out of control -- and suggest some things that might help.
10 warning signs
You aren't sure where your debts come from, or how much you owe.
If you're in debt but have no idea how you got there, it suggests you are routinely over-spending -- perhaps on small, everyday items. Likewise, not knowing how much debt you have implies you aren't in control of your finances.
Your budget doesn't balance, or you haven't got one.
If you spend more each month than you earn, or can't be sure that your salary is covering your expenses, you could be storing up serious trouble for the future.
You're only paying the monthly minimum repayments (MMRs) on your debts.
Repaying only the MMR on your debts will mean they take far longer, and cost you much more, to clear in full.
Your monthly spending on credit outstrips the amount you're paying off your debts.
If you regularly have to pay for necessities such as food and petrol using credit, this could indicate a serious problem.
You're robbing Peter to pay Paul.
If you sometimes find yourself using one form of debt to meet the repayments on another, you may find your financial situation getting worse -- particularly if you are using credit card cheques, cash advances or payday loans.
It isn't unusual for you to be late paying bills, and you sometimes exceed your credit limits.
Failing to make necessary payments on time or over-spending on your credit card or overdraft will mean you incur extra fees and charges. This will drive you further into debt and could also damage your credit rating.
You have no savings.
At The Fool, we've always believed it's sensible to build up a savings cushion of at least three months' pay in case of emergencies. If you can't see a way to set aside some money each month because your debts are too expensive, this is another warning sign that they could affect your financial future.
Your total non-mortgage debt exceeds your annual income.
This is a sign your debts may be difficult for you to repay.
You're frightened to talk about your situation.
If you're finding it difficult to be honest with your family and friends about your problems -- or worse, are fibbing to them about your spending -- it's possible you're in denial about your debts.
You're constantly worried about money matters.
If you're having trouble sleeping, aren't eating or are finding your work and leisure time affected by money worries, it's a sign that the stress of your financial situation could affect your health. If this applies to you, please seek help before that can happen.
Things you can do
If you recognise yourself in any of the situations I've described above, no doubt this has worried you. Perhaps this article has prompted you to consider how seriously debt is affecting your life -- and how you could start to deal with this.
If it's time for you to tackle your debts, I'd strongly recommend that you seek help and advice from the friendly Fools on our Dealing With Debt discussion board. Here, you'll be able to post your individual Statement Of Affairs and get tips on the best way to handle your situation.
I'd also suggest sharing your problems with family and friends. This should provide a real sense of relief -- and you may find them an invaluable source of support as you start to bash away at your borrowing.
No two people are the same, so it's impossible for me to prescribe the perfect debt solution here. However, this article by Serena Cowdy, and Neil Faulkner's follow-up to it, propose some excellent common-sense steps you could take.
No matter how much -- or how little -- we owe, right now I think getting back into the black should be a priority for all of us. As Britain slides towards recession, times are likely to become harder for many people.
In my opinion, sorting out our individual balance sheets will give us the best chance of surviving those difficult days -- and eventually coming through them into a far brighter future.