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How To Know When You Are Approaching Financial Trouble

How To Know When You Are Approaching Financial Trouble
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BY STEVE NUBIE

For many of us in our 50’s it’s a long time to 62 and our first shot at social security or other retirement funds.  Here’s how to know if you’re going to make it financially. 

For more and more people over 50, managing month-to-month expenses is a growing problem. Many have found themselves unemployed or underemployed with part-time jobs that limit cash flow and cause a continuing drain on savings and investments.

The inevitable outcome is serious financial troubles that can lead to increasing debt and a serious compromise of lifestyle and growing stress.

The only solution is to anticipate the potential for financial problems and take some steps to alleviate the problem through planning and preparation.

Step 1 – Inventory your assets      

Assets are all of the things that you own that have cash value. This could include real estate, personal property, cars, investments and savings, jewelry and collectibles, and retirement plans.  Take the time to total up your assets and make the best effort to assess their current value.

Step 2 – Total your liabilities 

Liabilities are defined as debt related to mortgages, car loans, and other amounts owed to a creditor or lender. This should not include your monthly expenses.  We’ll get to that later.  Once you have totaled your liabilities subtract them from your assets and this will give you your net worth.

If your net worth is a negative balance you’re already in financial trouble and should strive to increase income and reduce debt.

Step 3 – Estimate your monthly income 

This is the totally monthly amount you receive from a job, dividends or interest and other income producing activities. Total your average month income.

Step 4 – Estimate your monthly expenses 

These are all of the bills you pay on monthly basis for mortgage, rent, utilities, food, clothing and entertainment. Don’t forget to anticipate the average monthly expenses for annual payments such as real estate taxes if you have paid off your mortgage, or other annual expenses that should be tallied in your monthly expenses.  Once again you need to do the math and subtract your expenses from your income.  If you have a negative balance at the end of the month it’s an obvious sign of financial trouble, but there are some other signals you should consider.

  • If you’re using credit cards to make monthly payments for anything it’s a sure sign that financial problems will follow.
  • The same is true if you are using any investments or savings to pay monthly expenses.  It means you need to reduce your monthly costs or add to your income in some way before you exhaust your savings.

Step 5 – Prepare for unexpected expenses 

What’s good about average monthly expenses is that they’re fairly predictable. But what do you do when the car needs a new transmission or the furnace or other appliances require major repairs or replacement?

If at all possible, have an emergency fund set aside for these possibilities. Unfortunately many people in financial trouble or approaching that stage have already exhausted this fund.  The result is the payment is made with a credit card and the debt grows.

Step 6 – Avoid the “Debt Trap”

A debt trap is when you incur a credit debt to payoff a different credit debt. Credit card companies often offer debt transfers to payoff one loan with another.  It may seem like you’re buying time but you’re only delaying the inevitable.

Step 7 – Negotiate 

Many people are surprised at how reasonable some creditors can be when negotiating reduced monthly payments or other payment plans. This is not an altruistic demonstration from a creditor.  They are well aware that at a certain threshold many people simply give up and stop paying.  There are consequences for that behavior from legal action to affects on credit reports and actions from collection agencies, but when people become overwhelmed many have no option.

Call your creditors if you’re having trouble making payments and most of the time they will help you design a payment schedule you can handle.

Step 8 – Develop a retirement timeline 

If you’re 55 and think you might start taking social security at 62 in addition to tapping pensions or other retirement savings, think long-term.

On your 55th birthday you’re 84 months from early retirement at 62.  Do you have enough savings, monthly income and other assets that can get you through the monthly expenses including the unexpected?  Now’s the time to figure that out.  You may think you’re doing fine only to find out at age 59 your debts and liabilities have caught up to you.

Step 9 – Take action 

Once you understand the long-term implications of your financial situation you’re in a better position to take steps to avoid financial troubles. Consider the following:

  • Reduce monthly expenses starting with luxuries such as entertainment, restaurants, premium cable service, home water or milk delivery, and other expenses that are not necessary.  Instead of home improvements consider home repair.
  • If that is too dear, cut down on the frequency of eating out or entertainment and think twice about those exotic vacations.
  • Increase monthly income either through a second job or some other activity that allows you to add to your monthly cash flow.  This can range from selling on eBay to other activities that allow you to supplement your income.
  • Ditch the credit cards.  Lock ’em up.  If you can’t afford to pay cash, don’t buy it unless it’s an emergency.
  • Keep score and track your progress as you payoff debt.  When you finally payoff that car loan, drive that old car as long as you can.
  • Try to supplement some degree of savings if you can.  Think of it as your emergency fund.  If you’re 12 to 7 years from receiving income from retirement funds or social security a lot of unexpected things can happen.

The bottom line 

Don’t get caught by surprise. Make your best effort to anticipate any challenges to your financial situation and have a plan.

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