Managing rents, school fees, utility bills and daily expenses along with loans on a limited paycheck can be a challenge for many. It can lead to a situation where debts spiral beyond an individual’s current repayment capacity. You may find it impossible to make your monthly repayments on time even though you want to. This difficulty in managing your financial obligations is a telltale sign of being ‘financially overextended’.
The warning signs
Here are the top five apparent signs of a looming financial disaster.
- You have trouble settling monthly bills – This is the first red flag to watch out for. It means that you have every intention of settling your dues every month in full but are unable to do so. This problem will only get worse with time since you will receive any future bills with non-payment charges and penalties added in.
- You are living paycheck to paycheck – You are headed down a dangerous path if you depend on every subsequent paycheck for survival. Living paycheck to paycheck is a vicious cycle, and one that’s really hard to break. Struggling at the end of each month, having no savings or emergency fund – All point towards financial adversity.
- You put everyday expenses on credit cards – If you are stretched enough to be putting your day-to-day expenses on credit cards, your finances might be taking a serious downfall. Buying on credit means you are purchasing items you basically cannot afford. If your everyday expenses come to that, it signifies a great deal of stress on your financial health.
- You carry credit card debts for extended periods – Not unexpectedly, compounding interest on credit cards can multiply your outstanding debt and lead you down a dangerous debt spiral.
- You tap into your savings or dissolve investments to pay off debts – Regularly exploiting your savings and investments to settle debts is a major warning signal that you are facing a serious financial crunch.
Risks of being financially overextended
It goes without saying that you must never incur more debt than you can afford to repay. Credit card debt, especially, has an exponential nature and can easily pile on. When you consistently extend your individual debts beyond what you can repay, the overall debt burden will inevitably grow and become all the more unmanageable. The power of compound interest can transform even your moderate balances into extraordinary amounts, way more than what they appear to cost you at face value.
The burden of these obligations combined with the pressure tactics adopted by debt collection agencies can also take a toll on your psychological and oftentimes physical health.
Excessive debts also reflect negatively in your credit score. Taking out multiple loans in a short period of time lowers your credit rating as it indicates financial irresponsibility.
Recovering from financial disasters
It is important to recognize and amend a financial predicament before it reaches a state which is beyond redemption. In the event you find yourself financially overextended, here are some ways to salvage the situation.
- Renegotiate with your creditors for alternative debt settlement plans. You can also hire a professional credit counselor for advice.
- Periodically evaluate your debt situation to see if there is a way to bring down the interest and reduce the cost of your debt.
- Create a budget.
- Consider downsizing.
- Create friction between purchase and payment. Avoid credit cards.
- If nothing else works, aim at increasing your income stream.