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Many of us can relate to the experience of spending more than we should, paying bills late and playing around with credit cards in a way that is ultimately financially detrimental. The downward spiral to financial difficulty can happen very quickly and so it’s important to know and watch out for the ‘red flags’ that can signal financial trouble.

What are some of the definite signs of financial problems?

1 – Your emergency savings do not exist

If you have no money saved and available in the case of emergency, this can be problematic. Ideally, you should have between three and six months’ worth of savings in reserve and this cash should be set aside from other funds, but be easily accessible.

If you do not have such a fund, it’s wise to begin saving a designated amount of money from each pay you receive, even if you are able to save only $20 or $50 from each pay period. It’s recommended that you arrange for these funds to be automatically transferred and deposited into an account specifically for emergency needs. If you’re not sure how to budget in way where you can transfer a specific amount into savings, it pays to get a professional financial advisor like Positive Solutions Finance to take a look at your current situation and take note of what areas you are spending too much.

2 – You pay bills late and you pay penalties

The habit of paying bills late suggests that you do not have enough income to cover your spending habits and/or that your system for paying bills is inefficient. By paying bills after they are due, you will almost certainly need to pay extra money in the form of interest, late fees and penalties for reconnection. You may also end up with a poor credit rating.

To remedy this problem, schedule your payments and initiate an organised system for paying your bills.

3 – You pay just the minimum amount necessary on your credit cards

Although the temptation to pay ‘only what you have to’ on your credit cards each month can be tempting, doing so is financially perilous. By paying only the minimum amount due, you actually pay just a small part of the finance charge and nothing off the principal amount or interest.

It’s critically important to pay your credit card on time each month and pay off as much as you can. If you can pay more than the minimum amount, you will have a much better chance of saving and investing your money in the longer term and ultimately putting money towards the goals that you really want to achieve.

4 – You have no personal budget

Unless you have a clear understanding of the amount of money that you bring in each month, combined with a solid plan for how it will be spent, you’re at risk of overspending, accruing debt, and failing to save so that you have the opportunity to invest and work towards your financial goals. Formulating and following an accurate budget is the best way to avoid this likely path to financial difficulty.

5 – You ignore financial documents

Far too many people avoid opening and checking statements pertaining to things such as their superannuation and bank accounts. It’s actually very important that you cross-check and verify the information on statements with your activities and accounts.

Taking the time and making the effort to scrutinise your financial statements can not only help you avoid financial problems, but ensure that you stay informed and aware of your personal financial situation.

To avoid the risk of financial difficulty, it’s imperative that you know and recognise the signs that you are fast slipping towards financial hardship. Pre-emptive, prompt and diligent action is needed to keep your accounts in the black so that you have the best chance of a healthy financial future.

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