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Six Questions to Determine If Financial Trouble Could Be Brewing

Whether you consider yourself to be financially responsible, or you always seem to come up short on cash, there are a few key indicators that may indicate you are living beyond your means—and being aware of them can save you loads of money woes in times of a cash emergency.

1. Do you have an emergency fund?

Need some motivation to start saving? Sit down and add up how much money you make each month. Then, multiply that amount by six.  That is the amount that most financial advisers recommend as an emergency fund.

Most individuals underestimate life’s uncertainties and discount the need to have cash available for unexpected events like unemployment, illness, disabilities, and family emergencies.  Also, if you have a less-than-stable career or you’re self-employed, the recommended amount is as much as 12 months worth of income. If you don’t have anything near that amount saved, and worse, you’re in debt, you’re living beyond your means.

2. Do you vacation on credit?

You work hard and you’ve earned that vacation, right? Consider this financial rule of thumb when it comes to credit purchases: If it takes you longer to pay for the purchase than the actual “life span” of the item, you can’t really afford it.

Start a plan to save money for vacations well in advance of the time you’ll need to book tickets or make reservations—even if you intend to charge your trip for purchase protection reasons.

Make sure you pay the balance down before you’re charged a dime of interest and be realistic about all the “extras” that can add to the cost of a trip, like tips, parking, and baggage fees.

3. Do you only consider monthly payments when buying a car?

Aside from a home, a car is one of the most expensive items you’ll purchase in your life. While it’s understandable to focus on monthly payment amounts when determining how much car you can buy, your ability to afford a monthly auto loan payment doesn’t mean you can afford the car.

If you’re in doubt, consider the duration of the loan: If it’s longer than three years, and doesn’t result in owning the vehicle outright at the conclusion of the loan, you’re shopping out of your true budget.

The same premise holds true for auto loan refinancing: If you’re refinancing because interest rates have dropped considerably since you initiated the loan, that may be a money-smart move.

If you are refinancing only to lower your monthly payments, and refinancing means that you are extending the life of the loan, you’re not actually saving money — you’re just stretching out the payments.

4.  Have you purchased a home after having determined that you can only afford a 30 year mortgage?

If you’ve calculated the amount of home you can afford based only a 30-year fixed mortgage scenario, you may be taking on more than you can really afford.  Instead of strapping yourself to a 30-year fixed mortgage payment, consider how much more affordable less house with a shorter loan term is—despite the higher monthly payment.

By opting for a four percent, 15-year fixed mortgage on a $250,000 home loan over a comparable 30-year fixed loan, a homeowner could save $97,020 in interest over the life of the loan. Further, you will own the home in less than two decades.

5. Have you paid an overdraft fee in the last 12 months?

If money is so tight that you have to rely on overdraft protection in order to float your lifestyle, you’re living beyond what you can afford. Period.

6.  Have you exceeded your credit limits within the last 12 months?

Exceeding your credit limit doesn’t just cost you in over-limit fees.  Because your credit score is based largely on your debt-to-utilization ratio, which is the difference of the amount of available credit you have to what you’ve used, your credit score is lowered when your credit balances are high and it signals to lenders that you’re in over your head.   Lenders can lower or terminate your lines of credit at any time for cause.   This will leave you with few options.

If you answered YES to three or more of these questions, you need to talk to a professional.  You may be heading down a path that could result in the filing of a petition for protection under Chapter 7 Bankruptcy.

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