Most of us live on the edge – the edge of serious financial problems. Many Americans walk a fine line between financial solvency and financial misfortune. Many people don’t even realize they’re on the wrong side of that line until it’s too late. They tend to practice the “ostrich” syndrome, which is to not face up to problems and wait until “tomorrow” to solve them. Are you flirting with financial disaster? Here are eight signs to watch out for that could tell you that you’re tottering on the brink.
- Juggling bills and making payments late
- Counting on a windfall in the future
- Constantly fighting with your spouse or partner over finances
- Paying overdraft fees on a regular basis
- Not saving any money
- Taking money out of your retirement account to pay for today’s expenses
- Using your home as a piggybank
The worst of these warning signs
While all these are serious warning signs that you may be on the wrong side of the line between financial security and financial disaster, the last two are probably the most serious. You might be able to juggle your bills and make late payments for several months and recover from this but if you’re taking money out of your 401(k) or IRA to pay for groceries or a dental appointment, you’re taking a double loss. First, you’re literally stealing dollars from your retirement. Second, the money you take out now won’t be earning compound interest.
Why your home shouldn’t be your piggybank
There are times when it might make good sense to refinance your mortgage or take out a second or get a homeowner’s equity line of credit (HELOC). If you’re carrying a lot of high-interest credit card debt, it might be okay to use the equity in your house to pay it off. Mortgage rates are now near an all-time low. If you were to cash out, say, $30,000 to pay off $30,000 of credit card debt at 19%, you’d have lower monthly payments that would free up money you could save for your retirement.
The downside of cashing out your equity
The downside of a HELOC is that it would add debt to your existing mortgage. As an example of this, if you had a $200,000 mortgage and got a homeowner’s equity line of credit for $30,000, you’d now owe $230,000. Plus, you would have another monthly payment on top of your mortgage payment. Unfortunately, the same is true of a second mortgage. It would just heap more debt on top of your existing mortgage.
Refinancing your existing mortgage wouldn’t add much to your monthly payment – if you were able to get a lower interest rate. Let’s say you were able to refinance a $200,000 mortgage at 5% to a new one for $200,000 at 3.75%. Your current payment (not including taxes and insurance) would probably be in the neighborhood of $1,074. A new fixed rate, 30-year mortgage might be somewhere around $926 or a savings of nearly $150 a month.
Note: For some a few tips about refinancing your mortgage, watch this video from the credit-reporting bureau TransUnion.
A savings of $150 a month would be the same as a nice little raise but would come at a price. You would be obligating yourself for another 30 years of mortgage payments. If you had only 20 years left on your existing mortgage, you’d be committing yourself to 10 more years of payments. Again, if you were to use the equity you took out to do something worthwhile such as paying off high-interest debt or financing your child’s education, this could be a good choice. But what you don’t want to do is use the money if you’re in a bad financial situation and just want a new car or a lavish vacation
The danger of making just your minimum payments
Another serious warning sign of danger ahead is if you’re making just the minimum payments on your debts month after month. The reason why this is evil is because you literally might never get out of debt. In fact, the credit card companies base their entire business plan on this as that’s how they make money.
Maybe you’ve never thought of it this way but if you pay off your balance(s) every month, your credit card companies earn practically nothing. You’re the one who benefits because you got to use their money for at least 30 days – interest free. What these companies want you to do is start carrying you balances forward so they can charge you interest. Next time you receive a statement from your credit card company, compare the interest you’re being charged to the minimum monthly payment. The odds are they’ll be about equal. This means that if you make only the minimum payment, you’re just paying interest and doing practically nothing to reduce your balance. We saw one example of this recently where it would take nearly 27 years to pay off a $10,000 credit card debt if the person was making just the minimum payments every month.
If you don’t want to collapse into financial insolvency, make sure you watch for these eight danger signs. If you see you’re starting to borrow from your retirement fund, using your house as a piggybank, constantly juggling payments or overdrawing your checking account, you need to develop a budget and a plan for getting your finances under control. If you need help, don’t be ashamed to go to a credit-counseling agency. The good ones have experienced counselors who will go over your finances and help you develop both a budget and a debt management plan (DMP). Even top professional golfers like Tiger Woods have coaches and maybe you need one, too. As they used to say in an old TV commercial, “it couldn’t hurt.”