Debt is a serious problem and millions of people are battling debt every day. Although a loan or borrowed money can work as a quick fix for pressing financial needs, it however can become a burden when it accumulates and you find it difficult to pay back. As you’re probably aware, many people find themselves in a continuous financial down-spiral but fortunately here are 7 signs you have a debt problem so you can avoid this financial crater yourself!
Sign #1: You have no savings
The first sign that you have a debt problem is that you have no savings. Only a few people have enough money saved against emergencies, or to use to invest. The sad reality is that many people do not have any amount as savings and many others do not save enough. Both are potential signs that you have a debt problem because it is those debt repayments that are hindering your ability to save. And as you probably know, without saving enough money, you will still be in a serious financial challenge. Some people think that if they can make enough money every month then they can spend as they please and don’t need to save. But this is wrong because emergencies can arise when you have no savings and having no savings means you will have nothing to fall back on which can actually lead you to taking on more debt.
During emergencies, people without savings find it difficult to cope. For example, someone who lost their job without savings will still need money to survive. It becomes difficult for them because they are not being paid anymore. The next thing they would usually do is to look for means to borrow money. However, since they are no longer working, it may become difficult for them to pay back the money that they borrowed. This is how debt begins to accumulate gradually until it becomes a serious problem.
When you have no savings, it is a sign that you are not properly managing your finance. To overcome this debt problem, you have to create a plan that will help you avoid further debt and repay the one that you owe. It is usually advised that you need to have about 3 to 6 months of your monthly expenses saved for an emergency. Therefore, if you are reading this right now and you have no savings, make it a habit to start saving immediately.
Sign #2: You have no budget
Another sign that you have a debt problem is that you have no budget. Many people who have debt problems see having a budget as a burden and not as a tool to help them achieve financial success. Because of that, they just spend their money any way they like instead of carefully planning the best way that they can use it.
One of the excuses that some people give for not having a budget is that they do not need it because they make enough money. They believe having a budget is for poor people who do not make enough money but are looking for ways to manage the little that they make. However, this is not true because having a budget is for everyone no matter how much you make. One of the ways that rich people manage their money is by having a budget. They use a budget to allocate how they will spend their money and that is the reason why they can save and invest a lot of money at the end of the day.
When you do not have a budget, it is easy to get into debt and difficult to get out of debt. People without a budget do not have a plan for their money and they spend it easily on anything that they see. They do not have any restraint when it comes to spending and that is why some of them can spend all their earnings without saving anything. Sometimes, most of the things that you spend money on are not necessary and you can stop spending money on them or reduce how much you spend on them. For each time you reduce how much you spend on items that are not important, you will have more money to spend on the things that you need or even save more money. People who have a budget can easily eliminate unnecessary spending and focus on how to repay their debts but people without a budget will most likely accrue more debt.
Sign #3: You don’t track your spending
Another sign that you have a debt problem is that you don’t track your spending. Without tracking your spending, it will be difficult for you to have a budget which I just mentioned as being key to your financial success. Only a few people can remember how much they spend in a month and even with a budget, if you are not tracking all of your purchases then you are setting yourself up for financial failure.
This is because you even if you took the time to create a budget where you even outlined how much debt you want to repay, if you overspend because you aren’t being conscious about your expenditures then you won’t have the money at the end of the month to square off your debts.
One of the reasons why some people do not track their spending is that they think it is not possible. Tracking how you spend your money does not require any special skills. All that you need to do is to take note of everything that you spend your money on. It can be as simple as writing down everything you buy with a pen and paper. You can also make use of applications like Microsoft Excel if you want it to be more organized.
Sign #4: You buy things you don’t need
Buying things you do not need is a sign that you have a debt problem and people who often buy things that they do not need do so to impress others. Just like Dave Ramsey said, “We buy things we don’t need, with money we don’t have, to impress people we don’t like.” The basic needs of every human are food, clothing, and shelter. Once these basic needs are met, the others are secondary and we may be able to do without most of them. For example, it doesn’t matter whether you have a car or not because you do not need it to survive. That means a car, even though it offers immense convenience, is not a basic need.
If you keep buying things that you do not need, you are most likely going to end up in debt. Even basic needs can be delineated based on their level of financial reasonableness. For instance, you need to buy shoes but it doesn’t mean they have to be a designer pair. Expensive or not, a high-end or affordable show will both offer the same function. In reality, you want that nicer pair of shoes to feel good and show off but these are exactly the wrong reasons to be spending money.
Sadly, many people confuse their wants with their needs. Needs are what you cannot do without while wants are things that are necessary but you can do without. You will always be in debt problems if you always buy things that you do not need. Another example of a thing you do not need is an expensive wedding. Everyone wants to have a big and expensive wedding but it is not necessary. How much you spend on your wedding is not what makes it enjoyable so if you do not want to have a debt problem, you can organize a low-cost wedding.
Another way you spend money on things that you do not need is on some membership and monthly payments like gyms membership and cable payment. You can review your membership for some of these to see which one you need and which one you can do without.
And finally, one other reason people spend money on things that they do not need is that they think they are getting a good deal. They buy things that they do not need just because they are on sale. But buying something you do not need at discount is still not a good deal. It’s a waste of money.
Sign #5: You only make the minimum payments
When you want to pay back the debt on your credit card, there is a minimum requirement that every lender expects you to pay back every month. This amount can be as low as $20 or just 2% of the total amount that you owe. Most people just pay this minimum amount because they can easily cover it. However, if you only make the minimum payment on your credit card, it is a sign that you have a debt problem.
Paying only the minimum on the credit card means you will have to take a long time before you will be able to clear your debts. Another disadvantage is that the longer it takes you to clear the debt, the higher the amount of debt you will have to pay back because of accumulated interest.
If you pay the maximum amount that you can afford every month, you are less likely to have a debt problem. Paying more than the minimum payments means that you will be able to clear your debt within a short time and it means that you will pay a lesser amount as interest as well.
Sign #6: You are paying down debt with other debt
Many people are in debt today and simply cannot save enough to cover their interest payments, so they instead resort to other strategies. One strategy used is to pay their old debt with new debt. That is, they borrow money from a new source to pay their outstanding loans. This may seem like a clever strategy but it is a sign that you have a debt problem. Paying debts with other debts doesn’t mean the old debt is gone. What you simply did was transfer the debt from one creditor to another.
Now, this can be beneficial or detrimental depending on how you do it. If you were to pay your student loan down that carries a 3% interest rate using your 19% credit card then you are effectively exchanging your lower interest debt for more burdensome debt. On the contrary, if you are paying down high-interest debt like your credit card with a lower interest line of credit then this is actually a wise money move and should help you avoid paying more interest in the long run assuming you actually pay it off.
Sign #7: You have maxed out credit cards
There is a maximum amount that you can spend on every credit card you own. This amount is the total amount that you can charge to any card. This means that a credit card with a limit of $1,000 that has a balance of $1,000 is maxed out.
Maxing out your credit card is also another sign of a debt problem. When you max out your credit card, it is an indication that you have become too reliant on paying with plastic instead of paying with cash you have available. This also can put you in a dire financial position if you have no savings and an emergency arises because likely your fall back plan was to defer to taking on more debt which you can’t do if you’re maxed out.
Not to mention, keeping one or multiple credit cards maxed out keeps your credit utilization on the card (i.e your balance to limit ratio) high which will lower your credit score and make future borrowing more challenging!
Therefore, if you’re wondering if debt is about to be a big issue in your life, check for the signs I’ve just previously mentioned!