Question: I'm concerned I'm overspending and heading toward a debt problem. What are some warning signs that I might be facing a financial crisis?
Answer: During the holidays, most consumers are focused on spending. However, some consumers may not realize they are spending themselves into a financial crisis. But there are some warning signs.
First, evaluate your debt-to-income ratio. Is the amount of debt you're carrying greater than 20 percent of your take-home pay? If this answer is yes, it might be time to figure out how to reduce your debt load.
Another sign of a debt problem is making only the minimum payment on your credit card bills. Making only the minimum payment means you're paying very little toward the principal amount of your debt. The National Foundation for Credit Counseling recommends making at least double the minimum payment.
Consumers facing financial difficulties also might use credit cards as a way to replace income instead of cutting back on spending.
In addition, consumers in a financial crisis find themselves using credit cards to purchase necessities, such as groceries, or to make payments on monthly bills.
So what do you do if you find yourself facing a financial crisis?
The first step is a thorough assessment of income and all expenses. If you don't use a budget, now is the time to begin to do so. Do a complete accounting of all expenses and debt payments. Consider everything you are spending money on and how much you are spending. Compare that with the income you have coming in, and make adjustments as necessary.
If you're unsure exactly how much money you're spending each month, track your expenses. Notate everything you are spending money on. This would include small purchases such as lottery tickets, stops for coffee, or snacks from the vending machine. It might surprise you how much these items add up over a month's time.
In some cases, a reduction or loss of income is at the root of a financial crisis. In those cases, it's important to prioritize your debt and always secure your housing expense first.
When income is not the issue, re-evaluating spending habits and prioritizing needs vs. wants can sometimes alleviate a financial crisis and help you put your money to better use.
Heather Murray is manager of education and resource development for Advantage Credit Counseling Service (dba Consumer Credit Counseling Service). For more information about the agency's services, please visit www.advantageccs.org. If you have money or credit management questions, you can email Ms. Murray at firstname.lastname@example.org. Please provide your name, address and daytime telephone number with all inquiries. Ms. Murray tries to reply to all inquiries but, because of the volume of questions she receives, she cannot always respond.