People get into debt trouble in many different ways, but one common thread is they usually started spending tomorrow’s dollars on today’s wants.
Many of them started down a slippery slope, such as taking out home equity loans to spend money on something like a vacation. That kind of borrowing behavior predated the beginning of the recession in 2007. I think it was an early signal that our culture had grown comfortable with literally mortgaging the future in exchange for immediate gratification.
Most people who wake up one day and realize they are buried under a mountain of debt got into that situation by making small daily decisions that slowly grew into a crisis.
To avoid your own debt crisis, be vigilant for these warning signs:
• You don’t have an emergency fund. Everyone has unexpected expenses. Build a cushion of at least $1,000 to avoid using your credit card when your car breaks down or the water heater gives out.
• You use a credit card for small daily purchases and carry a balance from month to month. This behavior indicates you aren’t closely tracking little expenses that can add up to a big problem.
• You tap into your savings each month to keep up with your regular living expenses. Living above your means isn’t sustainable.
• You withdraw money early from your retirement savings plan, either through a loan or an early withdrawal. Putting your retirement at risk while paying financial penalties to do that is almost never a good idea.
• You take out a home equity loan to use for anything other than an improvement to the home that is expected to increase its value. Many people who owe more on their mortgage than their home is worth got into trouble by cashing out equity in their home.
• You are borrowing money from relatives and friends. Not only are you spending money based on income you don’t have, you are risking damage to your personal relationships.
• You don’t track your spending. During the recession the average income of the people we help became more middle class than before. Many of them never tracked monthly spending because they always had enough money. They were unprepared when they suddenly lost income.
• You don’t know how much debt you have. Our counselors find many people who come to us for debt help significantly underestimate the amount of money they owe, and aren’t aware of the carrying costs.
I encourage everyone to put together a monthly spending plan and routinely set aside money for savings to cover all of the predictable expenses that come up during the year. Any deviation from your plan should cause you to ask: Am I taking a step toward a debt problem?