People often associate good financial management with planning for the future. However, it can also be useful for your current situation as it helps identify any early warning signs of financial trouble.
Worrying statistics were recently revealed by a survey conducted by newly-launched financial literacy platform Multiply. According to the study, almost 70% of Malaysians are in need of financial literacy support.
21% of Malaysians were considered Finance Newbies. These are the people who don’t have a grasp of the basics of personal finance. Another 48% were ranked as Finance Cadets. This category belongs to those who had just started to get the hang of elementary-level personal finance.
These findings are consistent with previous studies which show the low level of financial literacy among Malaysians. For example, 75% of us are unable to fork out even RM1,000 for emergencies.
Even worse, household debt in the country currently stands at 82% of gross domestic product. Compare that, if you will, to the likes of Japan (58%), Italy (40%), and the United States (76%).
With the current economic recession due to the new normal, financial security has become even more important considering that a lot of businesses are shutting down and people are losing their jobs.
For these exact reasons, it is imperative that you know where you stand financially. If you are yet to reach a level of stability, then losing your job or even a decrease in income will put you in a troublesome position.
Here are a few early signs of financial trouble that you need to look out for:
1.You don’t know how much debt you have
This is one of the clear signs of poor financial literacy. Personal debt is usually calculated by your debt-to-income ratio (DTI).
You get this value by adding up all your monthly debt payments and divide them by your gross monthly income.
Your gross monthly income is generally the amount of money you have earned before your taxes and other deductions are taken out.
2. Lack of savings
As mentioned earlier in the article, studies reveal that 75% of Malaysians are unable to fork out even RM1,000 for emergencies.
Other surveys show that 60% of Malaysians aged 35 and below can’t survive more than three months with their existing savings.
Financial experts typically recommend having three to six months’ worth of living expenses set away in an emergency fund. More is better, though.
3. You spend more than you earn
This is the trap that people often fall into when they do not know their DTI. Furthermore, some even use their credit card to pay for monthly expenses.
Having a budget ensures that you will always have enough money for the things you need and are important to you. It will also help you avoid debt or help you work your way out if you are currently in such a situation.
Check out our article on 4 Budgeting Apps to Help Manage Your Finance.
4. You can only afford the minimum payment on credit cards and line of credit
If you only make your minimum payments every month, it can possibly take 20 to 30 years to repay a credit card. Ideally, you should repay the full balance on your credit cards or overdraft every month, and pay down what you owe on your line of credit.
5. You avoid opening bills and credit card statements
Opening your bills and credit card statements scare you. Part of you already knows this is a warning sign but you instinctively chose to ignore this. Perhaps, you think if you don’t acknowledge this, then it isn’t true!
6. Your applications for loans or credit cards are turned down
A credit score is a value to represent your creditworthiness. It relates to how likely you are to repay debt. Financial institutions such as banks and lenders use your credit score to evaluate your application for credit or loans.
If your applications for this facility is turned down, it may be an indication that lenders find you a high-risk borrower showing you may have overextended yourself.
7. Your financial problems are affecting your personal life
If financial issues are robbing you of sleep, causing you health problems, contributing to conflict with your partner or if you are hiding debts from your spouse, you should take all of these as signs of a potential problem and begin to look for solutions.
One of them is to seek help from The Credit Counselling and Debt Management Agency (AKPK), which offers free debt management programme, financial advisory, and financial education.
If some or all of these apply to you, start taking care of whatever financial issues you have immediately before it leads to bigger problems, like bankruptcy.