Life is uncertain and we don’t have control over what happens to us. However happy and peaceful our lives seem, a change in our buying patterns/a minor incident with severe repercussions would be all it would require to turn our lives topsy-turvy. However, the best thing one can do to lead a happy and stable life is to be watchful of signs that indicate the onset of a financial disaster, plan, and take the necessary measures to ward off such situations. But to keep financial disasters at bay, it is vital to develop an awareness of the indicators to look for to identify those situations. Let us now delve into some of those indicators.
i. Absence of emergency funds: The absence/ lack of a sufficient amount of money to meet emergencies have a very high tendency to destroy our financial security in one blow. The need to borrow money due to our thoughtlessness and absence of enough funds can lead to a situation where it would take months or even years to clear your liabilities.
ii. Frequently borrowing money: Inability to keep up with our bills may make us dependent on our kith and kin for help. While borrowing once creates temporary setbacks, frequently borrowing without repaying the sum previously borrowed is a very clear signal that you are in deep trouble. When this happens, your family and friends shall stop lending you money forcing you to look for other options which, on falling behind will have serious repercussions.
iii. You put a lot on your credit card: In case your family members are unwilling to lend money when in need, you might look for other forms of credit like a credit card. However, these instruments of credit come with high-interest rates, failing to repay which will begin to build-up interest. This, over time, will add to your liabilities, making their repayment extremely difficult.
iv. You take loans to pay loans: This is particularly relevant in the case of those who resort to pay-day loans, i.e., a short-term unsecured cash loan borrowed to meet the ends before your monthly salary gets credited. These forms of short-term loans come with exorbitant interest rates and make the repayment nearly impossible, thereby forcing the borrowers to take additional loans to pay back the old loans. This becomes ultimately becomes a costly cycle that continues until you’re no longer able to keep up with your payments at all.
v. Inability to pay bills on time: Delaying the payment of your bills by a day or two may not sound like a great deal, forcing your lenders to immediately report it to the Credit Bureau. But this might be an indicator that you are headed towards a financial disaster. Delayed payments, eventually affect your credit score, making it difficult for you to avail of loans in the future.
vi. Your financial problems affect your personal life: The way you handle your money plays has a huge impact on your personal life and relationships. According to an RBC survey, over 60% of Canadians lose sleep over their finances because of perceived financial problems. If financial issues tend to rob you of sleep, cause you health problems, contribute to conflict with your partner, or hide debts from your spouse, we recommend that you take all of these as signs of a potential problem and start looking out for solutions.
At times, we might face situations where some of the characteristic traits lead us into financial disasters. Bankbazar.com shared a story of of Rachel George, a 27-year old working-woman based in Bangalore, to elucidate the concept of financial disasters. Her story is an eye-opener for those who are preoccupied with thoughts amassing money. Rachel, despite being good at saving money, loved seeing a huge balance in her bank account. This habit eventually leads her towards paying a lot of penalties as late payment fees, which slowly ate into her savings until it all dried up.
THE WAY OUT
In case you are experiencing any of the above warning signals, we recommend that you take the necessary actions (like setting aside some emergency fund or cutting unnecessary expenses) before it becomes a headache. The sooner you take action, the better- it can help you avoid situations where your creditors make plans/ decisions for you.
You can also consider contacting a Credit Counselor or someone you trust, and together create a plan to bring your finances back on track. In case you start by trying to creating a plan on your own, a strong first step we suggest would be to use a budget calculator to come up with a realistic financial plan. Many financial websites have this tool that can guide you, point out problem areas, and give you tips to improve your spending plan.
Thus, we can say that possibility of experiencing financial disasters at any point cannot be overlooked, but the best thing to do shall be to keep a close watch on your income and expenses to identify signals and take the necessary steps to ward-off financial disasters.
“Do something today that your future self will thank you for.”- Sean Patrick Flanery
Idea & Concept: Suvin David, Research Analyst / Faculty
Content Development: Aswathi Satish, Niyog Consultancy Services Pvt. Ltd.