The Warning Signs of Financial Failure
Excerpt Adapted From: The Financial Shepherd®–
Why Dollars + Change = Sense by Glen Wright and Sy Pugh
Years ago there was a couple referred to the firm for financial counseling because they were behind on every bill. They were paying the minimum on credit cards that were all but maxed out, yet still finding a way to keep living their same lifestyle. Their mother had helped them for years and then she died. The mother did not have much life insurance, so they were now on their own. The couple did not budget or do any advance financial planning. They didn’t get serious at all until their car was repossessed, and that’s when they asked for help. In their situation, losing the car was the best thing for them because they needed a wakeup call. The wife could no longer afford to shop at Neiman Marcus, nor could he have season tickets to watch NBA games anymore. These were educated people with great careers who on the outside appeared to have no problems at all. But in reality, they had all the warning signs of financial failure.
It is difficult to open up about money, especially when you are hurting and especially when you feel obligated to keep up the appearance that everything is perfect. Those same people who are good clients now (after getting their finances straightened out), lied to me initially in our first meeting because they were ashamed of how bad things had gotten. However, one thing is always true, the numbers never lie. As we got more and more involved, they opened up, and our team was able to help them. No one can help you as long as you are living a lie. Keeping secrets never works. God sends us vessels to help, but first we have to admit to ourselves that we need help and that we can do better than what we are doing now.
Another example is that of an engaged couple ready to get married, but the woman lied about how much credit card debt she was in. After they were married the truth came out due to her terrible spending habits, and it nearly broke them up. It took time, but she finally followed a budget and stopped her elaborate spending, and now all is well. You can save a lot of time and energy by being truthful in the beginning because lies will always come out in the end.
As the saying goes, ‘Robbing Peter to pay Paul’ is a common warning sign of impending financial doom, and it will always catch up to you. However, it can make sense for emergencies if you borrow money at a low- to no-interest rate in order to pay off a high-interest item. Not only do you pay less in interest, your payment amount also goes down. However, what I have found is that many people only pay the lower payment, and have to transfer the payment again and normally there are even higher fees associated with that. In addition, there is a sense of relief because the financial burden has been lifted, and many people revert back to their old spending habits. That is a dangerous game to play, and it usually backfires. When you identify a financial warning sign, the best thing to do is seek assistance and change the path you’re going down immediately.
Too-good-to-be-true refinancing deals are rarely as good as you think they are. It is never a good idea to refinance any depreciable asset like a car unless there is a dramatic difference in interest rate. Never take out more money, because now you are paying longer on something that has even less value. There is something called liquidity, and you always want to try and owe less than what the asset is worth. Emergencies happen, and the more liquid you are, the better you can recover from the perils of life.
Frequently running out of money before running out of month is a common warning sign. This situation typically means you pay the minimum amount due on bills, you have rolling credit card balances, and your check is spent as soon as it comes in. This is no way to live. This scenario means you are simply overextended. There are changes that have to be made in the budget, sacrifices like eating out less, turning off unnecessary expenses such as digital or cable television, and shopping less. These things aren’t necessarily easy to do, but if you follow a strict budget, you may be able to escape a bad situation before it gets worse.