How to Avoid a Financial Disaster

With several hundred thousand queries per month on major search engines for debt consolidation, debt solution and debt relief, there is little doubt that there are a lot of people in serious financial trouble. They are looking for a way out.

By consistently spending more than what they earn these people are destined for financial disaster. How did they get into this state?

Banks and finance companies are complicit in the high incidence of personal debt because they actively encourage escalating personal debt via aggressive credit card campaigns. Hardly a month goes by when my own letter-box doesn't contain an application for a credit card. Often there are personal details and amounts already filled in. All I have to do is sign the thing and send it back - in the pre-paid envelope, of course.

You can always tell when a company or entity like a bank wants you to do something for their ultimate benefit - they include a pre-paid envelope. That is always a good hint.

It has been estimated that some people are spending, on average, somewhere between 101% and 110% of their monthly incomes. This, of course, is made possible through the use of multiple credit cards and store cards.

Mounting debt is like a cancer. It creeps up on you. By the time it reaches critical mass it becomes extremely difficult to manage. Before this eventuates it is essential that you have a clear picture of exactly what your financial position is. As they say: "prevention is better than cure."

If you have not yet taken stock of what you are earning versus what you are spending then you should take steps to find out NOW! Before it is too late.

Here is how to do it:

First, add up every scrap of your expenditure for the next month. Carry a small notebook. EVERY time you spend money - cash, credit card, store card or check - write it down and tally it up. Even if you spend just $1 on a newspaper or 50c on bubble gum - write it down. Every last cent.

Next, tally up all your income. This should be easy because you will probably have pay slips or some other method.

Now, divide your total expenditure (what you have spent your money on) by your total income and multiply that number by 100 to get a percentage. If the percentage is below 80% then you are relatively "liquid" with respect to financial capacity. The lower the percentage the better.

Here is an example of that:

Expenses = $4,000, Income = $5,000 $4,000/$5,000 x 100/1 = 80.0%

If your percentage is over 80% you need to be careful.

For example:

Expenses = $4,000, Income = $4,400

4,000/4,500 x 100/1 = 88.8%

You need to either:

(a) earn more income, or
(b) cut back on expenses.

Preferably you could do both. By attacking both sides of the equation you will always do better.

The closer you get to 100% the faster you need to address the cause of that situation. Unfortunately, many people have no idea how poor their financial position is until it is well and truly out-of-control. This is usually when a bank or finance company will decide to step in and impose itself. It will make demands that will require drastic action - like selling an asset to make the full debt repayment. And we all know that when time is a factor we never get the true value of the asset. That will then hurt you twice as much.

If you are one of those people living beyond their means (that is, with a percentage beyond 100%) then you need to address your financial position immediately. To continue to spend more than you earn is a sure-fire recipe for financial disaster. Eventually, it will all catch up with you and drastic measures will be required to be taken.

Be proactive, not reactive. Sit down, do the sums, make the adjustments to your lifestyle BEFORE some mercenary debt collector does it for you.

About the author:

Gary Simpson has written nine books on various subjects including "How to Save $1000's and Increase Your Net Wealth." If you are looking for a better financial future then go to Turn Debt Into Wealth.