Financial Distress, In layman terms, is the situation in which an individual may find it difficult to manage his/her personal finances. Financial Distress is not necessary linked only to borrowers. Even a debt free person can be in a Financial Distress. Another way to explain is when your expenses exceed your income then it implies that you are in a Financial Distress. Here expenses mean monthly outflow. It is an undesirable situation for any individual or a family. In my opinion, Financial Distress is not sudden phenomena. It gives timely and necessary warning in advance to fix the financial situation. The individuals who ignore these warnings land up in a Financial Distress. Smart individuals take necessary steps to avoid the same. Therefore, it is necessary to identify early signals of Financial Distress. It is similar to the onset of any diseases. The symptoms of diseases are visible in advance. Similarly, symptoms of Financial Distress are visible in advance. You can discuss this situation with your family members to overcome the same. The family members are in the best position to guide you. Let’s check what are these early signs
Financial Distress – Warning Signals
1. Default on Payment: The first and primary signal of a financial distress signal is default on any scheduled payment. A common misconception that default on EMI signals Financial Distress. The fact of the matter is that even a default of electricity bill, telephone bill, school fees, insurance premium, etc. are early signals of Financial Distress. It excludes default due to any operational and technical reasons. Sometimes the reasons are not beyond your control. For example, recently one of the readers posted a comment that he is getting his salary with a delay of 3 months. In such cases, though the reason is genuine for payment default but signals financial distress. The financial planning is crucial to handle such situations.
2. Dip into Savings for household expenses: As a thumb rule, you should save 30 Rs for every 70 Rs spent. In short, out of the income of 100 Rs, you should save 30 Rs. Now you must be wondering why 30 Rs because average National Savings Rate of India is 30%. If the situation demands to break into savings like FD’s, mutual funds, etc., then there is a reason to worry. Just to clarify that here savings mean savings for short term or long term goals. It is imp signal of Financial Distress. If you dip into contingency fund or savings & have visibility to replenish it in near future, then the situation is not that grim.
3. Sudden Expenses: Life is full of uncertainty, and you cannot plan 100%. Various insurance covers like health insurance, critical illness cover, accident insurance, etc. can hedge the risk. Still some corner is left for unplanned expenses. It put a strain on your existing finances. If you have planned for these sudden expenses, then there is no reason to worry. Now you must be wondering how an unforeseen expense is an early sign of financial distress. The early sign is our thought process that we will never face such situations in life. In short, we ignore the importance of financial planning that help in an emergency. Therefore, depending on your requirement, you may opt for insurance covers that assist in managing sudden expenses.
4. The increase in no of dependents: Though quite a unique point but i observed that increase in no of dependents is a very early sign of financial distress. It does not necessarily means an extension of the family. If one of the spouse stop working or retirement of parents also implies a possible increase in no of dependents. You should always foresee such events and plan in advance.
5. Employment Prospects: A bleak employment prospect is the earliest signs of financial distress. Have you ever wondered what happened to jobs like clerks, typists, telephone operators, etc. The sectors/industry like heavy engineering, hand loom, music distribution, etc. are almost dead. According to experts, technology will eclipse some other sectors in future. There is a consensus that banking sector will undergo a tectonic shift in next 5-7 years. It will be more and more technology driven. Therefore, job prospects in banking look bleak. As i shared in my previous post that Job Loss Insurance Cover is not available on a stand-alone basis in India. Therefore, poor employment prospects require mid-career shift but how many people foresee this.
Secondly, the sectors that are not performing well will be impacted like metals, power, etc. Lastly, the focus of govt on manufacturing through Make in India will generate more opportunities in this sector. The service sector overall is facing weakness. I already mentioned banking and another impacted sector will be technology. All the technology companies have cut their future forecast. It means the future is not so bright. If you are in any sunset sectors, then these are early signs of financial distress.
The above mentioned five signs are just some of the standard signals. An individual is in a better position to judge forthcoming financial distress. In some cases, the family members are the first ones to raise the flag. A flag from family members is ignored. Trust me, family members are in a better position to guide or support on financial matters. A financial distress not only impacts individuals but even their family members. Therefore, you should not ignore any red flag from family members on possible financial distress situation. It is important to discuss and find out a possible solution.
Words of Wisdom: Today’s generation is very lazy about financial matters. On the contrary, financial matters require top most attention. Early signs of financial distress are warning signals. Though i agree that once an individual is aware that he/she is in financial distress then he/she take necessary steps. The point is not that but to identify early signals and take corrective action on time. For example, in the case of bleak employment prospects you may think of mid-career switch. Though it may sound very tough and challenging not impossible. I also underwent the painful exercise of mid-career switch. As i keep saying that change yourself or change will change you. A financial distress is normally one way, if you check the danger sign at the entrance, you can avoid. Once you get in, then it is tough to come out. The best solution to avoid such situations is to keep your expenses in control. Always maintain financial discipline and follow good credit practices. Hope you liked the post.
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