News, Articles & Reviews

Many people in America are living beyond their means, as personal savings rates are at their lowest levels since the Great Depression, according to the U.S. Bureau of Economic Analysis. Dwindling savings mean that U.S. households are taking on more debt and are less able to absorb a financial blow like the loss of a job or a downturn in the economy.

If you are concerned that your finances could be in danger, there is a way to tell whether you're in over your head. This article will provide you with five key indicators to watch for. If you find that one or more of them apply to you, it is likely time to reevaluate your spending and work on a long-term financial plan. Recognizing the problem is the first step to finding a solution.

Sign No. 1 - Your Credit Score is Below 600

Credit bureaus keep track of your payment history, outstanding loan balances and legal judgments against you. They then use this information to compile a credit score that reflects your credit worthiness. The numerical rankings go from a low of 300 to high of 850. The higher the better. It's this score that lenders use to determine whether they'll grant a loan. In general, any credit score below 600 means that you are probably in over your head.

If you aren't sure what your credit score is, contact any of the major credit bureaus (TransUnion, Equifax, Experian) and have them send you a copy of your credit report. This document will tell you what the bureaus - and ultimately lenders and financial institutions - think of your finances.

Sign No. 2 - You are Saving Less Than 5%

In 2005, the average rate of personal savings was an astonishing -0.5%, according to the U.S. Bureau of Economic Analysis. That means that not only were we spending all of our income, but also that a good number of us were also dipping into personal savings. This was the worst savings rate that Americans have recorded since 1933 when it was -0.7% during the Great Depression. The rate has bounced back into positive territory, but in 2008, it still hadn't cracked 1% (Figure 1).

A savings rate below 5% means you could be in real danger of financial ruin if someone in your family were to have a medical emergency, or your family home were to burn to the ground. With savings this low, it likely means you wouldn't even have the money to pay the necessary insurance deductibles.

Ideally, everyone should try to save as much as they can, but in terms of targets, the rule most financial advisors suggest is 10% of your gross income. Beginning at age 30, if you were to save 10% of your $100,000 annual income in your 401(k), or $10,000 every year, and earn a rate of return of 5%, that money would grow to more than $900,000 by age 65.

Source