Debt Free

While many advocate getting and staying debt free, not everybody wants to follow the debt freedom path. Some would rather use debt to their advantage. It's definitely possible to use the principle of leverage as a wealth creation vehicle. In fact, leverage is one of the most time-tested methods of creating real wealth. As many have found out however, that 18% Visa card is not the financial vehicle of choice when you're trying to use leverage for wealth creation. Well, come on, just think about it for a second, please! If you're paying 18% annual interest, you'd better have stellar returns in order to generate a profit from your investments.

Given that you may not be one of those successfully using debt to their advantage, what are the signs that you can look to as early warning markers? These will tell you in advance when debt is about to become a real financial problem for you. They are the “Red Flags of Debt”. Pay heed, so you can spot debt trouble before it's too late.

1 – Debt accumulation rate – Are you adding to your debt every month or paying down your debt? If you're adding to your debt, at what rate are your debts mounting? If you just took advantage of a 0% financing deal to festoon your wall with a new 42” plasma TV so you could enjoy watching Rex Grossman give up the ball (again and again), that may be okay. Watch those kind of deals though. Typically they'll include a provision that will charge you a ridiculous amount of interest if you either make a late payment or miss the payoff date. Many have been stung by failing to pay off the balance in the alloted time and getting stuck with the entire interest amount. If buying that plasma TV was really just an aberration, you're probably not in trouble, but look at weather you're steadily accumulating debt on a consistent basis. If it's a trend, that's a red flag of debt.

2 – Minimum monthly payments are excessive. If the total of those payments exceed more than 10% of your net income, watch out. You're setting yourself up for trouble. That's another red flag of debt. As you may be aware, the minimum monthly payment is a wonderful little device used by creditors to keep you in financial indentured servitude for decades. Yeah, decades. It will take most people between 20 and 100 years to pay off their debts by using the minimum monthly payment method. Here's a thought, sucker; put all your credit cards on autopay for the minimum monthly payment only. That way you'll not be late or miss a payment. Oh, they love that! It's a convenient excuse for the creditor to jack up your interest rate and charge profitable fees. After setting up autopay, pay whatever you can afford, but preferably at least an additional $100 on the card with the most offensive interest rate. That's a little secret for automatically getting debt free.

3 – Negative Savings Rate – Look at your savings rate. Are your savings or retirement accounts growing? If so are the growing by more or less every month? If it's less, and it's consistently heading that way every month, you guessed it. No savings, or a consistently shrinking savings rate is another red flag of debt. If you are using more of your income every month to service debt, and saving or investing less, it's a warning sign there's a storm coming.

4 – Frivolous Spending – Just had to get the new dub dubs for that '95 Camry your drivin'? Come on! What the hell are you thinkin'? If you do things like get rims for your car that cost what the car's worth, that's a prime example of frivolous spending. Ditto for Carribean cruises or anything else where you're spending money on nonessentials when you have substantial credit card debt. Buckle down, ace! The little things add up too. Try switching from Grey Goose to whatever's on the gun. You're friends won't care, really.

Watch these debt warning signs. You can use them to spot and avoid a debt nightmare before you living it.