Identifying Common Financial Problems

How financially healthy are you? You may already know the bad news. Or perhaps things aren't quite as bad as they seem.

When was the last time you sat down surrounded by all of your personal and financial documents and took stock of your overall financial situation, including reviewing your spending, savings, future goals, and insurance? If you're like most people, you've either never done this exercise or did so a long time ago.

Financial problems, like many medical problems, are best detected early (clean living doesn't hurt, either). Here are some common personal financial problems:


Not planning. Human beings were born to procrastinate. That's why there are deadlines — and deadline extensions. With your finances, unfortunately, you have no deadlines, and you may think you have unlimited extensions! You can allow your credit card debt to accumulate or leave your savings sitting in lousy investments for years. You can pay higher taxes, leave gaps in your retirement and insurance coverage, and overpay for financial products. Of course, planning your finances isn't as much fun as planning a vacation, but doing the former will help you take more of the latter.


Overspending. The average American saves less than 5 percent of his after-tax income (in contrast to those in other industrialized countries, where the savings rate is two to three times that in America). Simple arithmetic helps you determine that savings is the difference between what you earn and what you spend (assuming you're not spending more than you're earning!). To increase your savings, you either have to work more (yuck!), know a wealthy family who wants to leave its fortune to you, or spend less. For most people, the thrifty approach is the key to building savings and wealth.


Buying with consumer credit. Even with the benefit of today's lower interest rates, carrying a balance month-to-month on your credit card or buying a car on credit means that even more of your future earnings are earmarked for debt repayment. Buying on credit encourages you to spend more than you can really afford.


Delaying saving for retirement. Most people say they want to retire by their mid-60s or sooner. But in order to accomplish this financially, most people need to save a reasonable chunk (around 10 percent) of their incomes starting sooner rather than later. The longer you wait to start saving for retirement, the harder it will be to reach your goal. And you'll pay much more in taxes to boot if you don't take advantage of the tax benefits achieved by investing through particular retirement accounts.


Falling prey to financial sales pitches. Great deals that can't wait for a little reflection or a second opinion are often disasters waiting to happen. A sucker may be born every minute, but a slick salesperson is born every second! Steer clear of those who pressure you to make decisions, promise high investment returns, and lack the proper training and experience to help you.


Not doing your homework. To get the best deal, you need to shop around, read reviews, and get advice from disinterested, objective third parties. You need to check references and track records so you don't hire incompetent, self-serving, or fraudulent financial advisers. But with all the different financial products available, making informed financial decisions has become an overwhelming task.


Making decisions based on emotion. You are most vulnerable to making the wrong moves financially after a major life change (a job loss or divorce, for example) or when you feel under pressure. Maybe your investments have plunged in value. Or perhaps a recent divorce has you fearing that you won't be able to afford to retire when you had planned, so you pour thousands of dollars into some newfangled financial product. Take your time and keep your emotions out of the picture.


Not separating the wheat from the chaff. In any field in which you're not an expert, you run the danger of following the advice of someone who you think is an expert but really isn't. If you look in the mirror, you'll see the person who is best able to manage your personal finances. Educate and trust yourself!


Exposing yourself to catastrophic risk. You're vulnerable if you or your family don't have insurance to pay for financially devastating losses. People without a savings reserve and support network can end up homeless. Many people lack sufficient insurance coverage to replace their income. Don't wait for a tragedy to strike to learn whether you have the right insurance coverage.


Focusing too much on money. Too much emphasis on making and saving money can warp your perspective on what's important in life. Money is not the first or even second priority in happy people's lives. Your health, relationships with family and friends, career satisfaction, and fulfilling interests should be more important.

Most problems can be fixed over time with changes in your behavior.