In this series I am covering the 24 tell-tale signs that you could be in financial trouble. Over the next few weeks I will be presenting these signs, how to identify them and tips on how to address the issue.
It probably doesn’t come as much of a surprise that not having adequate or any savings at all is a sign of financial trouble. The reason this is the first sign on the list is that bad things happen to good people, and more often than not these are unexpected events. Without a safety net of some sort of savings or emergency fund you are setting yourself up for getting into even further financial trouble.
Things happen all the time and it is part of life. Whether it is a loss of income, a natural disaster, accident, unexpected sickness or even an unexpected child there are many possibilities out there that could impact you. We hear stories in the media all the time about people suffering from one thing or another and it is easy to conclude that it won’t happen to you. This is a big mistake.
Clearly if you have absolutely no savings at all it is a sure sign that you could face significant financial troubles in the event of something unexpected. But what if you currently do have some savings, is it enough? There are many different schools of thought on this; some say three months of expenses while others say six. Clearly the more savings you have the better but this is not an easy thing to achieve and generally doesn’t happen right away.
Perhaps the most difficult aspect of saving money is actually taking that first step. If you don’t have any or much savings it is probably because money is tight, so the thought of putting money aside when there are other bills to pay may be quite stressful. If you don’t have one already you need to open a savings account. This could be through your local bank or credit union or through one of the online savings options such as ING Direct. The most important feature of this account should be that it allows you to make systematic and automatic contributions.
Next, you need to determine the frequency and amount of money to save. If it isn’t an automatic process you will probably end up unable to keep your commitment to save. For starters you should determine how frequently you want money to be deposited into your savings account. The more frequent the deposit the less you will feel it. If you are paid weekly, great. Either set your direct deposit with your employer to deposit part of your paycheck into the savings each week. If you don’t have direct deposit or don’t want to hassle changing it you can do the same thing with automatic transfers from your checking account. Each payday simply schedule an automatic transfer into your savings. If you are paid bi-weekly you can follow the same steps. Coordinating deposits with pay will lessen the impact of that money leaving your account.
One of the difficult things to consider when establishing a savings plan is determining how much to save. When you look at the dollar amount required to cover a few months worth of expenses can be very discouraging. The key is to try not to look at the ultimate dollar amount and instead look at it on a monthly basis. Generating savings will take time so if you can look at it on shorter terms it will seem like an obtainable goal.
When things are tight it is hard to let go of any money. If this is the case you just need to start small. In an example let’s say you are paid bi-weekly. Would $10 coming out of your paycheck really be noticed? Probably not. This comes to only $20 per month, which you are probably saying is almost nothing. That is true, it isn’t much money and at that rate it would take years to save up enough money to fund your savings. That isn’t the point. The point here is to establish something, even if it is small. This establishes a good habit which is what you need in order to be successful in creating savings.
Once you have established a regular and automatic deposit into your savings you will generally not even notice that money coming out after a few deposits. You begin to forget and just adjust your spending to work within the new net income. This is the point in which you need to make changes. If you get used to $10 or $20 coming out per paycheck, bump it up after a month or two by another $10 or $20. Let that new amount come out for a few paychecks or months and then add a few more dollars to this amount. This gradual process will reduce the shock and allow you to slowly build up your savings.
Remember, this doesn’t happen overnight and don’t expect it to. Most people get discouraged simply because it seems impossible to save a sizable amount of money in a short amount of time. So start slowly and with modest amounts, then adjust those amounts in small increments over time. Before you know it you will be saving enough money to adaquately build your savings in a reasonable amount of time. The real key is to get into the habit of saving money regularly. Time will take care of the rest.
24 Signs That You Could be in Financial Trouble
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About the Author: Jeremy Vohwinkle is a Chartered Retirement Planning Counselor® and spent a few years working as a financial planner. Today, he helps people make the most of their money by writing about personal finance here and elsewhere on the web. Jeremy is also Coach at Adaptu and a regular contributor for other publications such as Intuit, and American Express. Be sure to follow Jeremy on Twitter or Google+.