The Debt Disaster

In “Après moi le déluge” I discussed the indicators that are warning us some of our state governments are headed towards bankruptcy. In that article, I also observed, “When an individual begins to use borrowed money (credit cards) to meet current operating expenses, be assured, the end is near.” I would like to expand on that theme. Some of these ideas can be found in “10 Tip-Off You’re Heading for a Debt Disaster,” by Brian O’Connell.

Number 4 from my list of 10 Basic Financial Rules for Young Couples, states:

When your money stash is declining (and it will) find out where your money is going. Keep detailed records (every penny) of your expenditures if necessary. My wife and I did this twice during the early years of our marriage. It proved a very enlightening exercise.

The earliest sign of trouble is usually a drop, particularly an unexplained drop in your bank account balance. Something is wrong. Perhaps it is a major expenditure that you planned, like a vacation or a new set of tires for the car. Perhaps, you are losing control of your finances and are headed for major problems.

The author considers rising credit card balances the second indicator of problems. I consider any balance on a credit card to be an indicator of a problem. Consider number 3 on my list of 10.

Don’t use a Credit Card unless you can pay it off every month.

I REALLY BELIEVE this to be the true cornerstone of any plan for financial sanity. The misuse of credit cards causes more problems in more marriages than just about anything except for, perhaps, sex and family issues. There is an exception to this rule. I have a friend who runs a small business. By skillfully moving her balances from credit card to credit card in order to take advantage of zero interest introductory rates, she has successfully managed her business cash flow problems, paying little or nothing in interest and other charges.

I have given her a standing offer to write an entry for this blog.

If you do not carry a balance on your credit card, you do not have to worry about how to make payments. I have posted a number of pieces on the power of compound interest (see “The 800 Pound Gorilla and You” from December 2009). Making minimum payments, in some cases, leads to years of debt that can triple the cost of a disposable item (like a big screen TV).

Debt Card Overdraft Charges are a certain indicator that you are no longer in control of your finances. I don’t like or use a debit card. If I put two $20.00 bills in my wallet in the morning and they are gone by the end of the day. I have immediate feedback on my spending patterns. If I wait until the end of the month to receive a debit card statement, it may be way too late. It is altogether too easy to rack up several hundred dollars worth of overdraft charges on a hand full of small purchases.

The End is Near!

The final indicators from the article, “10 Tip-Off You’re Heading for a Debt Disaster,” point toward immediately impending doom. If any of these problems are a part of your life, stop what you are doing and take account of your situation.

“If you’re juggling your monthly bill payments” In sitcoms the hopeless dad looks at a stack of bills saying something like, “Hey, we paid that one last month,” as he throws the new bill in the trash. If you are juggling your monthly bill payments, get rid of as many as possible as quickly as possible. That would start with cable TV.

“You don’t know how much you owe,” Child please, I can’t even wrap my brain around this one. When I owed money on my house, I maintained a Lotus spreadsheet that recalculated my status every month. If you do not know how much you owe, sit down with your bills. Do it today. Then develop a plan to rid yourself of the debt parasite. Several methods have been discussed in the blog. (See The Debt Avalanche, The Debt Snowball, and the Debt Snowflake from September and October 2009).

“You’ve got a credit card collection” Really, I don’t think it is necessary for anyone to have more than two credit cards. My wife and I have only one credit card account. This is pretty old school. I can imagine situations when a second credit card could cover you if there was a problem with your primary credit card. Keeping track of more than two accounts offers too many chances for something to go wrong. It just isn’t worth the additional headache to carry a wallet full of cards.

Finally, if you find you are lying to yourself or your spouse about your financial situation it is time to stop and ask yourself, “Oh my Lord, Oh my Lord what shall I do, what shall I do?”

http://www.youtube.com/watch?v=qgRQCoY70Zw

Hush, hush somebody's calling my name
Hush, hush somebody's calling my name
Hush, hush somebody's calling my name
Oh my Lord, Oh my Lord what shall I do, what shall I do?
Sounds like Jesus, somebody's calling my name
Sounds like Jesus, somebody's calling my name
Sounds like Jesus, somebody's calling my name
Oh my Lord, Oh my Lord what shall I do, what shall I do?
I'm so glad, troubles don't last always
I'm so glad, troubles don't last always
I'm so glad, troubles don't last always
Oh my Lord, Oh my Lord what shall I do, what shall I do?