As I conclude this series I wanted to save the most important sign for last, and that is simply ignoring any of the other signs. For many people they realize that there is some sort of financial problem in their life but no action is ever taken to try and correct the problem. This is especially common when the problems stem from debt or a lack of income that makes it hard to save money or even pay bills. It is easier to put your head in the sand and hope the problem goes away by not thinking about it. Trust me, it won’t.

Recognizing the Problem

Recognizing the problem is the easy part. We all know when we have a bill that is late or a credit card that is maxed out or even the fact we aren’t saving anything for retirement. The problems themselves are are not too difficult to identify. The trouble comes after you identify the problem and you realize you don’t have an answer as how to resolve it so you start to ignore the problem. Over time this problem becomes nearly invisible to you and it simply becomes a part of life.

Take Action

If you have identified a problem you need to take action to resolve it. Ignoring it won’t make it go away and will likely just make things even worse. Unfortunately, taking this initial step towards a resolution is the most difficult thing to do. For many people it is difficult because there doesn’t appear to be an answer. If you are swimming in debt and can hardly keep up with your minimum payments you look at this problem as if there is no possible way out.

If you don’t know the answer for resolving your financial problem don’t stop there. Take a moment to seek help in finding the answer. There are many resources available both online, in print and in person to help you in almost any situation. But you have to remember that these problems won’t go away on their own and you need to take control of the situation if you want it to improve.

Inaction is Worse Than the Wrong Action

Sometimes we realize we need to take action in order to resolve a problem but we fail to initiate the process in fear of making a mistake. Maybe you want to start putting 10% of your money into a retirement plan but you aren’t sure of what investment choices to make. Or maybe you want to increase your payments on your credit cards but you are afraid this may hurt your monthly cash flow. This way of thinking is only a form of procrastination that you have created a justification for.

Unfortunately by not taking action or by delaying the action you are probably doing more harm than if you just begin even if it may not be the optimal solution at that time. This is especially true whenever there is compounding involved. It doesn’t matter if it is the compounding interest in a savings or investment account or the compounding nature of your interest on your credit card balances. Time is very important in these instances and once time is lost you can never get it back. It is one resource that you cannot create more of or change.

Review Your Situation

I challenge you to go take a look at the complete list of the 24 signs right now and identify which ones may apply to you. Jot them down or print off the list and circle each one. Then I want you to determine why this problem has occurred in your life and for how long it has been going on. Be e honest with yourself because it is important to not only identify the problem but to realize how long it has been going on and how it came to that point to begin with.

Once you have identified the problems that apply to you I want you to take one step in an effort to improve the situation over the next week. You don’t have to resolve the whole issue at once, but just make an honest effort to change it. These things don’t happen overnight and don’t expect them to, but by taking even the smallest step now will put you on the right path. You will slowly begin to improve your financial situation and also start to feel better about it as well. Once you begin to see the progress being made you will have the motivation to do more and before you know it you are in command of your finances.

Knowledge May be Power but Without Action it is Useless

You can read every finance book ever written, you can study the stock market until you have company data memorized and you can know the tax code like the back of your hand but without taking action that knowledge is just useless trivia occupying space in your head. Just because you know what you should be doing isn’t enough, you have to actually do it. It is important to gain knowledge and to learn what is necessary in order to improve your finances but unless you take that next step and put that knowledge into action you will never make any progress.

24 Signs That You Could be in Financial Trouble
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As we reach the end of this series I want to touch on a sign that is a little more difficult to identify. Personal finance is a simple concept on the surface with common advice such as:

• Spend less than you earn
• Save some of your income
• Insure yourself
• Invest properly

Within this basic framework is a complex set of issues that are as unique as you are. No two people are alike and no financial advice can apply to everyone. You define your own success. It doesn’t matter what people suggest you do because your situation is unique.

Where Do Goals Fit In?

If you lack goals you are lacking a gauge for success. It doesn’t matter what aspect of your life you are considering, without a goal it is impossible to define how successful you are. Goals can be very simple and broad concepts to very specific a finite numbers. Maybe one of your goals is to simply be able to provide a comfortable life for your family. While many people likely share this objective if it isn’t clearly defined in your mind it will be difficult to determine what comfortable means.

This is where specific goals can come in to provide a clear measure of success. You may have a desire to save more money for retirement which could be considered a goal, but how much more do you want to save? Do you want to increase to a certain percentage of your pay? Do you want to max out your contributions? Do you want to reach a certain dollar amount in your accounts? By defining this goal in specific terms you have an easy way to track your progress. If you never set the specific goal you have no direction or method to congratulate yourself or come to a realization that you aren’t doing enough.

Goals don’t have to be just about money either. You need goals in all aspects of your life. For instance, we all want to retire right? So when we say we’re saving for retirement what are we actually saving for? Do you want to start a business? Do you want to live in a cottage up in the country? Travel the world? Buy a yacht? You need to have a vision for what this hard work and saving is going towards. If you can envision the end result it makes it easier to accomplish. Just saving for retirement for the sake of saving because you know you should will seem more like a chore and make it less effective.

Setting Goals Lead to Creating a Plan

When you have created goals the natural action to take next is to create a plan. Once you can picture a goal you instinctively look for ways to accomplish this goal. All too often people know what to do but simply lack direction. If you have a problem with debt you clearly want to get out of debt, but saying that isn’t enough. If you set your goal to get out of debt in five years you now have a clear objective. Knowing the objective you understand that it won’t happen magically so you begin to set a plan in place. You calculate how much you need to pay each month, you call your credit card company to lower the interest rate to make payments affordable or to ensure you get it paid off in the time frame you have determined. Whatever the case is, when you have clearly defined your goals you instinctively begin to create a plan to reach that goal.

Plans don’t have to be complicated. They are there to keep you on track and so you can measure your progress. Plans are also not etched in stone and can and do change. Life isn’t static so your plans will change and evolve as your situation changes so be prepared to be somewhat flexible.

Why is This Important?

According to Psychology Today magazine:

It’s simply a fact: when people have goals to guide them, they are happier and achieve more than they would without having them. It’s a brain thing. Achieving a goal you’ve set produces dopamine, a neurotransmitter responsible for feelings of pleasure. Reciprocally, dopamine activates neural circuitry that makes you eager to pursue new challenges.

Goals provide focus. With no guiding vision or plan, people tend to drift. Goals provide a measuring stick for progress. Goals enhance productivity. They bolster self-esteem. And most of all, goals increase commitment, so you’re more likely to achieve whatever you set out to conquer.

There have been hundreds of studies done that demonstrate how people become more productive and are more likely to succeed when they define goals and establish a plan to achieve them. Another study also suggests those who write the goals down are even more likely to reach them than those who just keep the goals internally. This doesn’t mean you have to keep a log or write down everything but I would suggest putting down the most important few goals on paper and in a place that you will see it daily. Maybe on a piece of paper taped on the wall by your desk or inside your day planner. When these items are fresh in the mind you are reminded what you need to accomplish continue to work in a manner that is productive toward achieving these goals.

Don’t be a Wanderer

Take some time to define goals for yourself and establish a plan to reach them. Living by drifting along and just doing the basics can work but you can achieve more if you take the extra step to define what you want and how you’re going to get there. Not having clear goals or plans doesn’t mean you won’t succeed or that you’ll find yourself in financial ruin, but can have a significant impact on what you achieve and how quickly you get there.

24 Signs That You Could be in Financial Trouble
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Having the ability to save and invest money is a great start but that is only half the battle. You can save a lot of money yet do considerable damage to your finances by not investing it appropriately for your situation. Granted, saving something is better than nothing but the long-term effects poor investment choices can severely impact your finances.

Thinking About Risk

Everyone has their own risk tolerance and this tolerance generally changes as a person ages or different life events occur. Typically the younger you are the more risk you should be comfortable in taking and as you age you become more conservative. While this may generally be true nobody fits into a perfect mold based on age alone.

The main problem people have is not understanding risk and because of that they invest in a way that is either leaving money on the table or causing them to lose money when they can’t afford to. Most people simply categorize risk as the chance they will lose money but there are many other forms of risk to consider with all investment vehicles:

1. Market Risk: The most commonly thought of type of risk. Stocks in the market go up and down so investments in these securities can fluctuate and possibly even drop to zero in extreme situations.
2. Credit Risk: Fixed income securities like bonds also carry risk. Just because they pay a fixed interest doesn’t mean they safe. Just like people, companies carry the risk of being unable to repay the lender which could lead to the loss of your principal.
3. Interest Rate Risk: Going along with credit risk and fixed securities is interest rate risk. Since many of these investing vehicles require money to be locked in for a certain period of time interest rate changes up or down can have an effect on your underlying holding and/or mean you are leaving money on the table when higher rates become available.
4. Inflation Risk: This is the big one that most people don’t think about. Even if you have a 100% guaranteed investment either through an FDIC insured product or a government issued bond you are still subject to inflation risk. On average the annual rate of inflation is roughly 3%. This means even if you are earning a guaranteed 4% return on your money you are in reality only earning 1% before taxes. If inflation rises even slightly you are at the risk of actually losing money on a “guaranteed” investment.

Age is Only Part of the Equation

There are many different asset allocation models out there that tell you how you should invest based on your age. Unfortunately like much of the financial advice out there this is very general and should only be used as a guideline as everyone’s individual situation is as unique as the number of stocks in the market.

Some people have basic formulas that say 120 – your age equals the percentage of money you should have in stocks, others say 100 – your age, and there are even many other fancy calculations you can find on the internet to tell you what you should do. While this general rule of thumb is a good start it is far from the only thing you should be considering.

For example these calculations don’t take into account what type of stocks you are holding. You can adhere to the 90% stock and 10% bond rule yet find your allocation either extremely conservative or extremely aggressive. Not all stocks and bonds are created equal and these guidelines do not tell you how to further allocate those investments.

Your Specific Needs Matter Most

Even if you take the time to create the optimal portfolio based on the breakdown of stocks and bonds as well as ensuring it is diversified among those investments it still may be misaligned from your actual needs. Let’s first take a look at a 26 year old who just got married and they both have decent jobs and little debt. Common knowledge leads us to believe these individuals are in a position to be in at least 90% stocks so the couple invests in a few target date funds suitable for their situation. They are on the path to financial prosperity in retirement, right?

What if I told you that this couple had virtually no savings and planned on buying a house and starting a family in the next 1-2 years? They are maxing out their retirement plan contributions but have overlooked the requirement of creating a safety savings cushion or even working towards a down payment on a home. While it is great they are pumping as much as they can into a stock-heavy retirement account they are actually overlooking a few very important near-term needs. In this specific situation the 90/10 rule is not appropriate for them. Yes, they may want to keep their retirement plans allocated like that but they need to put a large portion of their money into cash-equivalent savings which could mean their actual overall allocation is maybe 50/50 which would seem very inappropriate for a very young couple with no debt.

I’ve seen just the opposite happen as well here with the retirement plan I work with. There are many employees in their 20′s who are invested 100% in their guaranteed rate fixed fund. It earns 4.15% right now. I don’t know their specific situation in order to determine if this is right or wrong for them but I would have to guess that this is not what they should be doing. Many probably signed up with this investment because they were scared or not informed of the benefits of the other investment choices. But if these people remain in this fixed account for any significant period of time they are probably going to be missing out on a lot of money that could have been made.

This Can Happen When You’re Older as Well

Just as a young couple can appear to be on track but overlooking an important immediate need the same is true for those who are approaching or in retirement. When I worked at a bank as an advisor I saw this all too often. I would encounter many individuals who were in their 60′s and had virtually 100% fixed income. In some cases it was nearly half a million dollars in a savings account or CDs earning 2-3%.

It this person was relying on the steady interest check generated from these investments as income to live off of, then yes this could be a suitable strategy. Unfortunately most of the people in this situation were not even using the interest that was generated and had no plans to for at least 5 years. Some were working on the side, others had pensions or relied on Social Security. So in this case these people are not even earning enough interest to keep up with inflation so they are actually losing money. Losing money is the whole reason they avoid stocks yet they fail to understand that even though the account is slightly increasing in value that their buying power is decreasing.

So in a situation like this people are doing what they were always told, and that is to move from stocks to “safe” investments when they retire to secure their money. Well, even if you are 70 and you aren’t relying on that money to live off of that doesn’t mean you should lock it up into something that protects your principal. Doing so could actually cause you to lose money thanks to the power of inflation while you leave a lot of potential money on the table that could have been gained by investing appropriately for your situation as opposed to just your age.

What Should You Do?

At the very least you should look at the various allocation models for a starting point. Generally speaking the younger you are the more you should have in stocks. Just remember that it doesn’t stop there. Take a look at what your actual holdings are to determine the real risk. Then take a look at other aspects of your situation that could affect your underlying investments. Maybe you plan on moving, you could be getting a new job, maybe a child is on the way or a home purchase is in your future or maybe you are shooting for an early retirement to start a business. All of these things are important to consider when creating your wealth so that you can invest appropriately in order to reach your goals, not just reaching a rule of thumb.

24 Signs That You Could be in Financial Trouble
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If you have children it is probably important to make sure they provided an opportunity to seek higher education later in their life. As most people are aware, the cost of college education is not getting any cheaper and in fact it is rising even faster than inflation. To help encourage parents to save for their child’s education there have been many tax incentives and specialized savings plans introduced. While these can be very beneficial ways to save they still may not be appropriate for everyone.

Your Personal Needs Come First

If you have a family there are a few issues that need to be addressed before you start stashing away money for college. First and foremost is some sort of emergency savings. I hate to hammer this topic into the ground but if you are married and have children it is more important than ever to have some money set aside in the event of a loss of income or some other significant emergency. Without this fund you would likely find yourself having to tap into other assets to cover the emergency; whether it is a credit card, retirement plan or even college savings plan, tapping into these can cost a lot of money in either finance charges or taxes and penalties assessed for early or unqualified withdrawals.

The second thing to consider is whether or not you are adaquately insured. Again, when you have a family and your income supports either part or all of the income your life and the ability to work is your greatest asset. Would it make sense to be tucking money away into a college savings plan when you don’t even have enough life insurance to pay for your funeral in the unforeseen event you lose your life? That event could prove devastating to your family.

What About Retirement?

One of the biggest conflicts people face is when they have the basics covered and they try to fund both retirement and college savings. Should you just fund retirement and ignore college savings? Should you begin to focus on college savings aggressively as your child approaches the time to attend college? Or do you find something in between?

Considering that most people can’t even find a way to maximize their retirement savings I don’t think putting a high priority on college savings is a very good idea. One thing about college is the number of unknowns. One thing is for certain about retirement, and that is we will all have to stop working someday whether we like it or not. We will get old and we will reach a point where we are either physically or emotionally unable to work enough to support ourselves fully.

With college there are plenty of unknowns that could affect the need or use of these funds. Will your child go to public or private school? Will they have the grades to attend anything more than community college or a trade school? Will they excel at a sport and receive a scholarship? Will they do outstanding and receive scholarships? Will they aspire to attend an ivy league school? Will they decide to become a lawyer or doctor that requires many more years of graduate school? Whatever the case may be it should be obvious that in the 17 or so years after your kid is born that there are many different outcomes as to what will happen. You are better off taking care of saving for something that is guaranteed before saving for something that is unknown.

But What if I Want to Provide an Education For My Child?

Certainly for many parents they want to be able to provide an opportunity for their child that maybe they did not have. Some parents may not have even gone to college while others may have had to foot the bill for themselves and don’t wish that upon their own child. This is a noble aspiration and clearly weighs on the minds of parents.

The problem is that there are many ways to fund education, but very few ways to fund retirement. If you want to retire will the government give you a loan? No. Will the government give you a grant or can you receive a scholarship for retirement by proving how accomplished you have been in life? No. Can you continue to work while in retirement to pay your way? Yes, this is something you actually can do, but then is it really retirement? Also, as you age you may not be able to physically work. One thing people forget is that our health is largely unpredictable as well. It may seem like a perfect plan to continue to work once you retire from your primary job in order to receive additional income. Well who’s to say you won’t find yourself diagnosed with cancer or another debilitating condition that prevents you from working? If that happens you are in a very difficult situation had you not saved enough as you needed to for retirement.

The bottom line is that there are many ways to pay for a college education:

• The student can work part-time: This one is actually a great option because it can not only provide money to get through school but many times the line of work can be related to studies and actually help the student in getting that first job upon graduation.
• Student Loans: At the very least you can get student loans to pay for education. I understand that this can later become a significant burden on the student after graduation but the money is available either for part or all of the tuition expenses if needed.
• Scholarships and Grants: This item is very overlooked. While this can require some work and possibly good academic records in order to qualify there are a ton of opportunities out there to receive money.

These are not all-or-nothing options either, in many cases you can utilize all three in order to make even a somewhat expensive college education affordable. In my case I had to utilize all three resources. First, I was able to get a little bit of money in the form of scholarships each year. With dozens to choose and apply for usually one would come through. Generally in the range of $1,000-$2,000. Next I worked on campus. Working for the university they paid a decent wage and were 100% flexible knowing that classes come first and even offered work during the summer as an option. That brought in between $5,000-$8,000 each year. And finally the rest of the tab was picked up by student loans, which after all said and done was for less than half of the required amount. It made attending a great university very affordable.

What Should You Do?

None of this is to suggest that saving for college is a bad idea because in fact it is a great idea. The thing to remember is to keep your priorities in order. First you need to be sure you are in a position to provide for your family in the event of an emergency or death. This is a first-line of defense that could make a difference in how your child’s life plays out in the event of something happening. Next you have to make sure you are doing what you can to prepare for your own retirement. Whether you like it or not you will have some form of retirement. The government won’t be there to bail you out. They may be able to provide some assistance with the current social programs but resorting to this could lead to a drastically diminished lifestyle that is borderline poverty.

This isn’t to say that you need to be completely maxing out every retirement plan you have before you can save for education, but it is important to ensure you are not sacrificing your retirement saving ability by saving for college. Remember, in a worst-case scenario even if you haven’t saved a dime for education your kids still have many options in order to get higher education. If the worst-case scenario comes up with retirement you could wind up living a miserable remainder of your life.

24 Signs That You Could be in Financial Trouble
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Homeownership is part of the American Dream and many finance pundits insist you need to become a homeowner in order to be successful. While it is true that owning a home can be a significant key to building long-term wealth and financial stability this isn’t always the case. There are many instances where buying a home can actually do more harm than good, and occasionally ruining your finances.

Why Should You Buy a Home?

There are many good reasons to buy a home:

• Mortgage interest and generally property taxes are tax-deductible
• The possibility of not paying taxes on the profit made selling a home (up to certain limits)
• Increases your net worth by building equity
• Possible appreciation in value of the home
• Freedom to build, design, and fully control the look and feel of your dwelling

These are all nice benefits for owning your own home. You can save money on taxes, your mortgage payments build equity (albeit sometimes slowly) which can in turn be sold for a profit in the future, and you have almost complete freedom in regards to how you want your home, yard or garden to look inside and out. But when the positive reasons to buy a house there are negative reasons as well.

Why Shouldn’t You Buy a Home?

Even good things have bad counterparts:

• The tax benefits may not be as substantial as you thought
• Real estate values do not always go up, or increase fast enough to guarantee a profit when you sell
• If you are young or uncertain where the future is headed, owning a home doesn’t provide the flexibility to move on short-notice
• No more landlord. You are the landlord and when something breaks, you need to fix it yourself or pay to have someone fix it
• General maintenance can eat up a lot of time and money

Finding the Balance Between the Pros and Cons

Buying a home is a very big decision whether you are married or single. Each situation is unique and just because conventional wisdom leads you to believe you must own a home sooner than later doesn’t mean it is right for you. Take a look at your situation to see if the benefits will outweigh the many negative issues.

Ask yourself these questions: Will the tax benefit really have that much of an impact over your standard deduction? Are you certain you will be working in the general area for years to come? Do you have the time and money to put into maintaining the home? If any of these answers are uncertain you need to really consider whether or not buying right now is the right decision for you.

Some People Say You Can’t Go Wrong Buying a Home

Wrong. You can do great harm to your financial future if you buy a home for the wrong reasons. This is especially true for people who either like to move frequently or have an job situation that may lead to a move within a few years. If something arises that requires you to move from your newly purchased home within the first few years you are looking at the possibility of losing a substantial amount of money.

First, the real estate market is a bit unpredictable which can be seen in real situations recently. If you need to sell a few years after you buy do you think the value has increased enough to be profitable? Even if the value has increased greater than inflation will that amount be enough to cover the thousands of dollars in fees and closing costs associated with selling the home? Also don’t forget that in some areas a home may take many months if not a year or more to finally sell. If you are pressed for time you may have to substantially reduce the price to get rid of it in a timely fashion.

Second, homeownership simply isn’t for everyone. If you enjoy city life it can be virtually impossible to find affordable housing in or around the city. It may be far more beneficial to rent. For others they are simply too busy to tend to the issues that come from owning a home. If you have a lawn, it needs to be mowed. If you live in an area that gets snow in the winter your driveway and walkways will need to be cleared. If your water heater breaks you will need to go buy another one and have it installed. Young professionals can find themselves too busy to tend to these issues, and while they require time, more importantly they require additional funds that you don’t have to worry about when you don’t own a home. These types of things alone can account for hundreds or even thousands of dollars a year.

Conclusion

As you can see, just because the talking heads on TV or throughout the internet boast about how owning a home is almost a requirement to become wealthy doesn’t mean it is for everyone. Don’t feel like you need to rush into buying a home just because all of your friends are or that you feel you need to in order to start building equity instead of throwing away money on rent. Clearly there are benefits to owning a home but if you make the decision too soon or for the wrong reasons you can find yourself actually doing more harm than good.

24 Signs That You Could be in Financial Trouble
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Today we wrap up the credit card topic by simply pointing out that if you have too many credit cards you could be in financial trouble. The real question is how many cards is too many?

The Number Doesn’t Matter

There isn’t a magic number that says anything above it is a bad thing. Each person will have their own number of cards that becomes too many. For some, having just one credit card is too many while others may be able to handle 10 cards without a problem. Don’t pay much attention to those who say you need to only have X number of cards or if you have X number you have too many. It really comes down to your personal situation so these blanket statements may or may not apply to you.

Finding Your Limit

If you have just one card and have trouble paying it off in full or have found you have reached the credit limit then the last thing you need is to get another card. Obtaining more credit when you are having difficulty paying for the debt you have already incurred is a recipe for disaster and it won’t solve your problem.

If your debt is under control and you can regularly pay for your purchases in a reasonable time and you aren’t maxing your cards to the limit you may be safe to handle another card. But just because you can doesn’t always mean you should. Ask yourself why you want the card, what benefit will it provide and then decide whether or not you really need it.

Don’t Fall Into the Trap

People generally don’t come into a financial crisis because they have one credit card with a $1,000 limit. People wind up in trouble because what starts out as an innocent single credit card can turn into two cards, then three, then four and so on until there comes a point where the individual can’t even keep up with all of the minimum payments. Credit is all too easy to get and people get carried away with the offers. When you combine multiple sources of credit with poor spending habits you will quickly see trouble arise.

Credit cards can be a great financial tool if used properly and they don’t always have to be avoided at all costs. But unless you know how to use them without going beyond your limits they can be devastating. Im sure you’ve heard the saying “guns don’t kill people, people kill people” before. The same holds true for credit cards: credit cards don’t put people in debt, people put people in debt. Like a gun, a credit card can be used for good or for bad. The item itself is harmless, but when put in the hands of a person they ultimately decide how it should be used.

24 Signs That You Could be in Financial Trouble
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The past few entries in this series have dealt with misuse of credit cards, and for good reason. Credit cards are one of the biggest reasons that people end up in financial trouble. Again, credit cards are not inherently bad, but using them incorrectly can significantly impact your financial future. Another misuse of credit cards can be when you use the credit available on one card to make a payment on another card.

Why This is a Horrible Idea

It should be quite clear as to why using high-interest credit to make a small payment on another high-interest card is a bad idea. I’m not talking about doing balance transfers, but I’m specifically referring to those who don’t have the cash to make the payment on a card so they use the available credit from another card to make the payment.

If you can’t afford to send in a check or make a payment from your available cash on a credit card, using another credit card to make the payment is simply a terrible idea. Generally someone who is in this position is going to be making minimum or close to minimum payments. Because of this that means it is unlikely that the payment taken out of the one card will be paid off in full anytime soon.

That $100 payment you made from your credit card, even if paid off in one year will wind up costing you $15-$30 in interest alone, not to mention the fact that you are not reducing your outstanding debt at all. Even worse are those who make this a recurring event, all it is doing is shuffling your debt from one card to another while being charged double the interest. If you want to be sure you’re in debt forever, this is a great way to do it.

It is Difficult, I’ve Been There Before

I know how hard it can be to avoid situations like this because I’ve been there myself. When I was self-employed I had a relatively small amount of debt in the form of a credit card, it was a card I used for the business and had a limit of around $5,000. Over time the balance had continued to grow when there wasn’t much income coming in and before I knew it even the minimum payments became difficult to make. So I had the brilliant idea of taking out a line of credit to use during times when cash flow was tight.

Boy was that a mistake. The line I received was for $10,000. I went a few months without using it but we hit a rough patch where we had almost no income. I used the line of credit, or what I considered our safety net to occasionally pay some bills that were not covered by the incoming money. Of course the intent was that business would pick up and we’d just pay it off in full. That didn’t happen and the next thing I knew we were writing checks from the line of credit to our credit card among other bills.

Over the course of about a year we went from about $5,000 in total debt to close to $12,000. The credit card came down a bit but all of those payments we made from the line of credit continued to mount. This resulted in increased finance charges on both of the debts as well as hurting our overall cash flow even further.

We finally stopped using the line to make payments, but for nearly 2 years following we couldn’t make much more than the minimum payments on each. Even at only 2 years we paid out over $4,000 in finance charges thanks to our stupidity. It was a very costly mistake. It is hard to realize how quickly things can compound and get out of control.

The Answer? Don’t Do It

I know, easier said than done when you are in a pinch, but honestly if you are faced with that decision you should look at your options. Unless you just experienced a devastating emergency that has suddenly depleted all of your funds this is a situation that is not going to be isolated. Thinking that you can do it just this one time and then get back on track is a bit foolish. More than likely you are going to find yourself faced with this decision at more times in the future which will lead to just compounding the problem.

If you are faced with a timing issue and are looking at a late fee versus using another card to make a payment then ask yourself what the true cost of that will be. If you are assessed a late fee and still pay in under 30 days from the due date it shouldn’t affect your credit report, but only cost you a bit of money for the late fee. Depending on how much the fee is and how large the minimum payment is it may actually be cheaper to pay the fee and send in your payment a few days late once you have the cash. Regardless, in either situation you need to take a hard look at why you are faced with this decision.

You need to address the real reason you’re in this situation. If you are resorting to using credit to pay other credit bills it is clear you are in trouble. The first step is to find out why you’re in this situation and make an effort to resolve it. There are many options you can take from contacting your lenders to discuss your situation to getting assistance with your debt or spending habits. Whatever your case may be, using credit just to make payments on other credit is only shifting the burden and costing you even more money in interest.

24 Signs That You Could be in Financial Trouble
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I don’t want to spend too much time on this one since it is fairly obvious, but if you find yourself paying only the minimum amount due on your credit card bills you are heading down a long road of almost eternal finance charges.

Understanding How Minimum Payments Are Calculated

Each card can be different, but generally speaking the minimum payment is simply a set percentage of your balance. Some cards are as low as finance charges plus 1% while others may base the minimum amount upwards of 4-5% of the balance. What you have to realize is that with a typical credit card APR that the minimum payment will generally cover only a little more than that month’s finance charges, meaning at best only half of your payment is going towards paying down the balance.

For a very simplistic example, let’s take a look at a credit card balance of $1,000 with an APR of 18%. If you break the APR down to a monthly rate you are effectively being assessed a finance charge on the balance of 1.5% per month. Lets also assume that the minimum payment is calculated by using 2.5% of the balance.

This means your minimum payment in the first month is $25, or $1,000 x 2.5%. With the APR at 18% and an effective finance charge of 1.5% that means of that $25 you paid, $15 is simply paying the finance charge leaving only $10 actually applied to the balance.

So the next month your remaining balance is $990, or $1,000 – $10. Your next minimum payment is $24.75. For this payment you will see $14.85 going towards the finance charge and only $9.90 going towards the balance. Your new balance is now $980.10. You have sent the credit card company nearly $50 of your hard earned money and have only reduced your balance by $19.90. That is quite a raw deal for you, but a great deal for the credit card company.

Ultimately, using this example if you continue to only make the minimum payments for the life of the balance it would take you 153 months or 12 years and 9 months to pay off the card and you will have paid $1,115.41 in interest; even more than the original amount you borrowed!

Don’t Get Caught in the Payment Mindset

Today you can get financing for anything, from the cheapest electronics to new furniture for your house. All too often we are lured in by commercials that state how low your monthly payments can be. When you look at purchases as monthly payments as opposed to what they really cost you are setting yourself up for a very long payment plan and significant additional costs in the way of interest.

Even if you do use credit responsibly you can still fall into this trap. I see people who have the money available to pay more than the minimum amount each month but they don’t. They want to keep the cash flow available for other things. They end up treating this minimum payment as simply a monthly bill and find themselves just budgeting for it. Once this becomes habit you may find yourself paying the minimum for a long time without realizing how much it is actually costing.

Try to Pay More Even if it is Only a Little

Understandably times can get rough and your only option may be to pay the minimum. That’s ok, just try not to make it the norm. Get into the habit of sending a bit more than the minimum each month. If your minimum payment is $25, try sending in $40. If it is $100, send in $150 or something. It may not seem like much or that it makes much of a difference but it does over the course of time.

Clearly it would be ideal to pay the balance in full every month but that simply isn’t possible for many people. By taking baby steps and applying a little extra it will help. It won’t be instant gratification but doing so can shave years off of the repayment and save literally thousands in unnecessary interest. Remember, just because they give you a minimum amount doesn’t mean you should pay them that amount. Doing so will only cost you far more in the long run.

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One sure way to find yourself in a dangerous financial situation is to pay for necessities such as utility bills and groceries with a credit card or cash advance because you don’t have the cash on hand. This becomes especially troublesome with the ease of getting a cash advance on your card. It may seem like a handy feature that you intend to pay off once you have the money but all too often that doesn’t happen. Then the cash advance interest rates can be substantially higher than a regular charge.

Slippery Slope

Using credit for necessities is a slippery slope. Your basic requirements in life such as food, water, housing and the like should be paid for by money provided though your income. If your income cannot support these basics you either have a significant spending problem or a lack of sufficient income.

If the money isn’t available to pay for groceries how does buying them on credit help? It can put food on the table for the time being but you still do not have cash. On top of that you have now just increased your credit card balance, the amount of interest that will be charged and the minimum payment amount. As you can see this is not a long-term solution. Using credit only further compounds the lack of money and puts you in an even worse financial situation.

What Can You Do?

If you are in a situation where you need to use credit to pay some basic bills it is time to seriously look at your situation. Is your spending under control and you feel like you don’t have enough income? If so it is time to see if you are living above your means. This could mean your rent is too high, you might have expensive optional utilities or even own a home when you probably can’t afford it. Whatever the reason you need to make a decision: earn more income or change your lifestyle to match your current income.

On the other hand maybe it is substantial debt or simply out of control spending that is forcing you to use credit to pay the bills. In this situation it is time to take a look at tracking expenses and creating a budget. Increasing income may help but it does not solve the problem of excess expenses.

There are an infinite number of reasons why we fall short with our money and the only way to address them are to realize what the problem is and work towards improving the situation. Using credit to pay your basic bills will only help you in the very short-term and long-term it is just a compounding problem. Without addressing the reasons why you’re in that situation will ultimately snowball out of control.

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There will always be something that comes up that you didn’t plan on. You may need new tires or replace a broken item on your vehicle or your hot water heater may go out. That’s ok, things happen and that’s life. Ideally you should have an emergency fund to cover these unexpected expenses but understandably that isn’t always the case. In cases like these it may make sense to use a credit card.

Many people think credit is pure evil and should be avoided at all costs. While yes, going into debt can certainly ruin your life if not handled properly, having the occasional unexpected event require using credit to cover the costs can be fine. The problem is that even though people have good intentions of owning a credit card for emergencies they tend to slip into some bad habits that spell disaster. It is when you develop these habits that you wind up in serious debt problems and can ruin your credit score.

Pushing the Grace Period

What many people don’t realize is that most lenders have a grace period for making payments. The due date may be on the 15th but you could actually have up to a week after that to make a payment and not be charged any late fees. Usually when someone finds out about this grace period for the first time they think it is great because they have extra time to make a payment. Taking advantage of this grace period can lead to problems.

Do you find you are often using the grace period? Do you need the extra time to actually make the payment? Do you find that you are taking the grace period up to the very last day and sometimes missing it because you waited too long and now you are faced with late payment fees? Doing this regularly is a dangerous habit to get into. Over time you begin to ignore the due date on your statement and you think that the last day of the grace period is the actual due date. Grace periods are there for mistakes that happen in life, they are not there to help you delay making payments. Stick to the actual due date and treat it as if anything sent in after will cause a penalty.

Pushing Your Credit Limit

This one happens all too often because it is so easy to do. When you start using credit for the very first time and make small initial purchases it is easy to pay them off. But after a while you may begin to just pay the minimum or less than the full balance. Maybe it is because money is tight, maybe you are treating that line of credit as an extension of the cash you have on hand. Whatever the reason you need to stop this snowball effect before it is too late.

Even a very small amount can accumulate over time with additional small purchases. Making minimum payments will barely cover the finance charges and before you know it you have accumulated a few thousand on that card. Now the outstanding balance is so high you have no hope of paying it off in full and you’re stuck with making minimum payments. You are now stuck in the middle of a vicious cycle.

Pushing the limit is a very bad habit for a few reasons. For one, if the credit was supposed to be for emergencies, with the nearly maxed out line of credit there isn’t enough money available to pay for any emergencies. Second, if you slip up and go over the limit you are socked with serious fees that can just put you even further over the limit. And finally, the ratio of credit used to available credit is a very important factor on your credit report. Running up the balance close to the limits will adversely affect your credit score even if you are always on time and never miss a payment. Don’t get into the habit of pushing your credit limit.

Being Chronically Late With Payments

This one may seem obvious but it still happens. When you fall into debt problems and money is tight it can be difficult to be on time. You may find yourself waiting until payday just to get that minimum payment only to find it is late and you are charged a fee. This is the absolute worst habit to get into. If you are making minimum payments and then having late fees assessed on top of that you could find that your balance on the card is actually growing. This is especially dangerous, not to mention the severe negative marks this will put on your credit report.

It is all too easy to fall into bad habits. What can start out as an acceptable reason for the use of credit can quickly turn into an insurmountable pile of debt. These bad habits, no matter how small can take years to reverse. These habits are difficult to change but the first step is to recognize the patterns you have fallen into and taking action.

24 Signs That You Could be in Financial Trouble
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