Most of us think we’re financially stable, or at least able. However, thousands of New Zealanders were declared bankrupt in the last few years. Considering the strong economy during this time and the possibility that the economy may stall next year, consumers may need to scrutinise their finances more carefully.

No Safety Net

1. Derived from numerous information sources, you should consider these practices of people dangerously close to financial instability to make sure you’re not heading the same way.
2. Spending more than 20 percent of your net income on credit card bills.
3. Borrowing money to pay off other debts.
4. Paying your bills on time, but running out of cash between wage/salary payments.
5. Using your credit card to pay for necessities because you don’t have the cash.
6. Paying only the minimum payment on your credit cards. As a rule of thumb, if you can’t pay double the minimum payment, you’ve got a problem.
7. Getting turned down for a consolidation loan. It means you’ve already over-extended yourself — your debt equity ratio is too high.
8. Refinancing a loan to reduce your monthly payments on another loan. If you’re 24 months into a 48-month loan and you’re looking to refinance because you’re over-extended and need to lower payments, it’s a definite warning sign.
9. Needing a guarantor. If the lender requires a guarantor to make a loan to you, then you’re over-extended. However, if you lack a credit history, this wouldn’t necessarily apply.
10. Financing your vehicle for six or more years. You’re doing that to lower your monthly payment, rather than focusing on reducing your debt.
11. Consolidating your loans but not closing the accounts where those loans originated. You’re afraid to do so in case you get into trouble again. If you don’t close off those other loans, you’re simply going to compound your problem.
12. Counting on the next “big deal” to see you through your financial trouble. You need to look at the big deal as icing on the cake instead of ‘that’s going to bail me out’. This includes inheritances!
13. Carrying more than four credit cards. There’s no reason to have more than two credit cards. No matter where you’ll go they’ll accept one or the other.
14. Waiting until near the end of your credit card’s grace period to pay, or requesting a higher credit limit.
15. Hiding purchases from your family, or fighting with your spouse about how to deal with your financial situation. Financial problems and domestic problems go hand in hand, or vice versa.
16. Depending on parents and friends to bail you out.

If you’re engaged in two or more of these practices, create a budget immediately, detailing all bills, debts and income. When you go to the ATM machine and get that $20, allocate where it is going, right down to the last cent. You may then see that Oh my gosh, I spent $50 this month on lattes or $20 on ice cream.

For those still not sure whether to be worried or not, the single rule of thumb is: If you think you’re having financial problems, you are. If you’re waking up in the middle of the night, worrying about money, you’re already in trouble.

Procrastination is your enemy. Get on with your debt reduction servicing so you may then focus your attention on your long-term investment objectives.

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Taking on debt is a bit like taking laxatives – a small amount makes life go more smoothly, but too much can leave you in the proverbial! The best way to avoid an overdose of debt is to start out in life without it.

There are many instances of young people loading themselves up with debt as soon as they start their working life on the premise that future earnings will pay for their present lifestyle. Generation Y are comfortable with debt because of their optimistic outlook on life and blissful ignorance of the consequences of paying interest on money borrowed.

I was impressed however, to be told recently by an eighteen year old keen to buy her first car that she wants to save up for it rather than get a loan because she doesn’t want to be in debt for the rest of her life! Buying a first car using borrowed funds can indeed be the end of a debt free life. By the time the loan is repaid, the car has dropped in value and needs replacing. Making loan repayments means it is hard to save and so more money needs to be borrowed to buy another car. It’s the start of a vicious cycle of debt that indeed can last a lifetime. Over that lifetime the interest paid on funds borrowed would be enough to buy any eighteen year-old a dream car.

It is not only the interest on debt that creates a problem; it is also the fact that debt imposes a commitment to pay that must be honoured regardless of your financial circumstances.

Debt repayment is not something that can be done only when you have funds to spare. By contrast, if you start regular savings for something you want to buy rather than going into debt, you can cut back on your savings if money becomes tight.

Economists analysing the current economic crisis are of the view that high levels of personal debt in the world’s major economies are at the root of our present troubles. Debt has weakened our resilience to economic shocks and unpaid debts have ultimately led to the demise of what were once rock solid financial institutions.

Who is to blame for this sad situation?

We have a society that ranks people by the number and quality of their material possessions, an impatient generation that lives beyond its means and lenders who have greedily spotted an opportunity to increase profits by dishing out debt to those who can least afford it.

The result is a growing class of people who are victims of debt, trapped by high levels of financial commitment that make it impossible to save and get ahead, and suffering extreme psychological as well as financial stress.

Whatever happened to social responsibility?

While individuals choose to take on debt, society has a role to protect those who are vulnerable to pressure from peers and the temptations of easy credit.

Legislation and regulation can offer some protection, but it is ethical behaviour on the part of lenders that will provide the solution.

For more interesting thoughts from Liz visit him here: lizkoh.businessblogs.co.nz

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