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In an ideal world free of financial trouble, all of your bills would be paid on time, you’d never have to take out loans and money would always be available when you need it.

Some people reach that economic utopia. But for most, juggling financial needs and obligations – bills, loans, retirement, family and so on – and still having a little fun can be a difficult balancing act. Almost everyone carries a credit card balance at one point or another, or has missed an occasional bill payment. But how can you tell if you're past that stage and wandering onto financial thin ice?

The situation is different for everyone, but here are some circumstances that should set off alarm bells.

The 4 Danger Signs

Encountering any of these four situations means it's time to examine your finances and see what you need to do to get back in control. Don't wait until the problems stack up to get moving.

1. You have no emergency savings.

If you have little to no money stashed away for a rainy day, your personal finance game could use some improvement.

Having no financial cushion for sudden surprises, like medical emergencies or automobile accidents, may force you to take out a loan to cover your financial obligations, adding interest and fees to an expense you already can’t afford.

You’re not alone: Forty-six percent of adults said they would not be able to pay a $400 emergency expense, according to the Federal Reserve's latest "Report on the Economic Well-Being of U.S. Households in 2015."

2. You took out a payday loan.

If you don’t have enough money to pay your bills coming up, what should you do? If you said “take out a payday loan,” you’re setting yourself up for a financial nightmare.

Payday loans are predatory by design. Lasting a very short time and backed by your paycheck, many people think the quick cash is their only option. But if you annualize the interest and fees that come with a payday loan, you will be stuck with a sky-high annual interest rate: the current average is 391%.

Personal loans from banks and even credit cards are a much better option when you need extra cash, since their interest rates at worst rarely exceed 30%.

For example, the average interest rate for a 24-month personal bank loan was 9.45% as of November, 2016, according to FRED data.

On the bright side, if you ever default on a payday loan, it will likely have a relatively minimal effect on your credit score. That, however, doesn’t make one of these loans a good choice. For more on how these loans work, see Beware Of Payday Loans.

3. You’re only making the minimum monthly payments on your debts.

The minimum monthly payments on credit cards and loans aren’t designed to help you quickly pay off your debts. Rather, lenders keep them low in hopes that your balance will last longer and accumulate more interest for them.

Let’s do a little math: Say you have $1,000 on a credit card with an 18% annual interest rate, and your minimum payment each month is the interest plus 1% of your balance (which would mean $25 for the first payment).

If you only make the minimum monthly payments it will take you 113 months (almost 10 years!) to pay off that $1,000 debt. By the time you’re done, you’ll have paid just over $923 in interest, making the total cost almost double the original debt.

If you can’t pay off your balance in full each month, at least put more than just the minimum monthly payment towards it.

And whatever you do, make sure you don’t outright miss a payment

4. You stopped saving for retirement.

There will come a time when you will be ready to stop working and enjoy yourself on the savings you've accumulated over the years, plus Social Security and other retirement plans, if any. Or it could come sooner due to injury, illness – or no one in your field being willing to hire someone your age. 

You won’t be able to take advantage of that time in your life if you haven't been able to save at least some of your income in a 401(k), IRA or other nest egg.

Once you’ve met your present-day obligations, contribute as much as you can toward your retirement savings. What you save now will be waiting for you to enjoy in the future – plus interest. 

The Bottom Line

These are only some signs you need to work on your personal finances. The most global one is feeling uncomfortable about the future and whether your finances leave you up to handling it. Don't wait until anxiety starts eating away at your mental and physical well-being – or putting a strain on the relationships in your life. Or until you start getting calls from debt collectors or have trouble getting your next car loan.

If you've never done a formal budget before, that's one way to start. For details, see our tutorial Budgeting Basics. You might also think about whether it's time to see a debt counselor. To learn more, read How To Find A Credit Counselor or visit the website of the National Foundation For Credit Counseling.

The sooner you start taking control, the sooner you'll be on your way to a better financial future. Preferably, long before it's time to retire!




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