Making Money Without

The line between a future of financial solvency and one of distress is thinner than you might think.

Unfortunately, many people don't realize they're on the wrong side of that divide until it's too late, says Jessica Cecere, South Florida regional president for CredAbility, a nonprofit credit counseling agency.

"I call it ostrich syndrome. You know that things aren't good, but you just don't want to face up to it right now," she says.

But the earlier you realize you're having issues with debt, the better chance you have of fixing them, Cecere says.

Bankrate offers eight signs you're flirting with financial ruin. If four or more of these signs sound familiar, it's time to seek help, Cecere says.

Cecere recommends looking for a free, nonprofit credit counseling service. You can search for a free or low-cost counseling provider in your area by visiting the National Foundation for Credit Counseling website or by calling (800) 338-2227.

Another alternative is contacting a fee-only financial planner. The National Association of Personal Financial Advisors maintains a database of fee-only planners on its website.

Here are the telltale signs you're heading for a financial fall.

Paying late fees and juggling bills?

Frank Boucher, principal of Boucher Financial Planning Services in Reston, Va., says habitually running up late fees typically has one of two causes.

"If you're paying late because you can't pay on time, that's a clear indicator (of future financial trouble)," Boucher says. "If you're paying late fees because you're just lazy about it, you're throwing money away."

A more serious symptom of financial distress is juggling monthly bills by making payments big enough and frequently enough to keep services flowing, but never paying balances on time and in full, Cecere says. Your debt worsens every month as balances grow.

"You're thinking ahead of time, 'I don't really have enough money to pay my bills,' and you're sort of living paycheck to paycheck," she says.

Counting on a future windfall

Basing your plans for financial stability on a future payoff, such as an inheritance, a run-up in the value of your home or a big tax refund can put your finances in dire straits.

It's also a symptom of a bigger problem -- rationalizing when it comes to your debt, Boucher says.

"You're planning on a bonus that doesn't materialize, or what we saw happening not too long ago, with people saying, 'I can always suck more equity out of my property,'" he says. "If you think like that, you're really setting yourself up for a fall."
Multiple credit card hocus-pocus

Credit cards are best used as a convenient way to make purchases without having to carry cash and to earn rewards, Cecere says.

"If you're a savvy consumer and you can use credit cards and you can get points for them ... then you're charging groceries and gas, but you're paying for them at the end of the month," she says.

If your credit card debt is consistently rising and you're unable to make more than the minimum payments, your balance will continue to rise. And if you fail to make the minimum payment for more than 60 days, your rate could jump, making your financial condition even worse.

While cardholders can stave off trouble temporarily by making the minimum payments or shifting balances to new cards, any kind of sudden change in your finances, such as a rise in gas prices, can destabilize your finances, Cecere says.

Fighting with your partner over finance

Most couples have occasional fights about debt, but if you regularly fight with your spouse about money, it can be a sign there's not enough disposable income to finance the family's spending, Boucher says.

Likewise, Cecere says if you're regularly suffering from stress over heavy debts, it could be an indication that your financial situation is unsustainable.

"It's on your mind, but you don't want to talk about it. You can't sleep at night because you're worried about your bills," she says.

If that description sounds familiar, Cecere says it might be time to seek a free, nonprofit credit counseling service.

Regularly paying overdraft fees

If you're constantly incurring fees for overdrawing your checking account, you could be on the brink of financial disaster, says Wayne Blanchard, senior partner at Money Professionals Group in Orlando, Fla.

He compares nonsufficient fund fees, or NSF fees, to the nautical flags raised to warn of dangerous wind conditions.

"If you're getting a lot of NSF notices, that's a hurricane warning flag. It's here," Blanchard says. "That's not a warning, that's a real problem here now."

Regular overdraft fees can occur for a couple of reasons, says Blanchard. Many serial overdrafters are struggling financially and don't have income available to cover their debts, meaning they're likely on the verge of having to declare bankruptcy.

You have a savings rate of zero

If you're unable to set aside a small amount of money for savings in your budget, your finances are on unstable footing, says Boucher.

"Savings is an expense, and it's something that should be budgeted for just like any other expense," Boucher says. "What's going to happen is something is going to come along -- an unexpected car repair or a home repair or an interruption in income -- and you're going to be in a very bad place."

He says that while saving may be difficult, not saving puts you at risk of financial hardship. "With no savings, you're really standing on the edge of a cliff," he says.

Blanchard agrees. He says many people rely on credit for their emergency backstop, but credit isn't effective as an emergency savings fund. If banks see you regularly adding abnormally high charges, they'll clamp down on your limit.

In order to be financially healthy, you need to set aside money for unexpected emergencies and for your future retirement, Blanchard says. While an emergency may never come, retirement certainly will, and you'll need to be financially ready.

Covering expenses with retirement savings

Borrowing or withdrawing retirement funds from your 401(k) is a common thread in many of the cases of financial distress that Boucher has seen as a financial adviser.

Boucher says, "401(k) loans are usually a bad idea under any circumstances, but when you have more than one, that's a sign that you're not managing your cash flow very well."

Regularly pillaging your retirement savings isn't just a warning sign you're living outside your means, it could have serious consequences for your retirement. It lessens the beneficial effects of compounding that help retirement funds grow.

Treating your home like a piggy bank

Using your home equity as a financial crutch is something Boucher often sees with clients heading toward financial distress.

Boucher says such moves are especially ominous if they're not due to a serious financial need but to a desire for "wants" like a vacation or a new car.

"You're paying for a vacation with a home equity loan and you're amortizing that over 15 or 20 years. That just doesn't make any sense," Boucher says.

This post originally appeared at Bankrate.com.

Exile on Wall Street: One Analyst’s Fight to Save the Big Banks from Themselves by Mike Mayo is one of the more important books to be published since the start of the financial crisis. Part memoir, part revelatory narrative of Mike’s career, this highly personal but informative book provides some very important information about how Wall Street works – or doesn’t – and confirms the view of many people than most deals are bad deals, done only to enrich the parties but not investors.

By way of disclosure, I need to say that Mike and I both worked at Prudential Securities in the early 2000s, he as an analyst and myself as a tech banker, so we never really got to know each other.  It may interest readers of The Big Picture to know that I have just joined Tangent Capital Partners in New York.  I will be focusing on financial advisory and asset management opportunities, but remain Vice Chairman of Lord, Whalen LLC, parent of Institutional Risk Analytics.  Maybe I’ll get to serve as receiver for Bank of America when they go belly up, but I digress.

A decade before Prudential, Mike and I almost crossed paths at the Fed, but he worked at the Board of Governors in Washington while I was at the Fed of New York.  The former is supposedly in charge of the central bank’s operations, but the latter is the older and more important part of the Fed system.  When Treasury Secretary Timothy Geithner was President of the New York Fed, he dispensed gifts and subsidies to Goldman Sachs and other banks without the prior knowledge or objection of Chairman Ben Bernanke and the other members of the Fed Board of Governors.  Suffice to say that there are no tennis courts at the New York Fed.

Mayo provides a lot of important detail about how the major Wall Street firms operate and, in particular, why the larger banks and their clients are more concerned about making money than creating value.  Mike learned as did I that truth is not beauty on Wall Street, except in those few, generally smaller firms that have been able to preserve a culture of client service and quality.  As Mike points out several times in Exile, many large cap mergers are done simply to cash out the managers.

“Two things are worth noting about these super-size banks,” Mayo writes.  “First, much of their growth has come from mergers and acquisitions.  They are not growing like Google, by creating a product and doing it better than anyone else.  Instead they are just buying out their competitors… Secondly, many of these banks would likely not have grown to their current size without federal assistance in the past.  In all the bank crises of previous decades, bank failures were thought to be too economically disruptive.  But government bailouts – including the most recent round – didn’t resolve that problem. They merely delayed it, allowing banks to keep growing in size and scope, making the potential cataclysm next time that much bigger.”

This quote hints at one of my criticisms of Exile on Wall Street, namely that Mike does not yet appreciate that nobody in Washington or on Wall Street wants banks, especially the largest banks, to behave.  There are many places in the book where I expected Mike to turn that corner of epiphany and state this case, but let me do it for him.

Whether you talk of the National Bank Act of 1865, the creation of the Fed in 1913 or the subsequent birthing of the housing GSEs in the 1930s, both the business community and their lackeys in Washington were more concerned about stoking employment and sales today than in safety and soundness of money or banks.  I touched on this point in my 2010 book, Inflated: How Money and Debt Built the American Dream, which begins with this quote from Hayek’s “Denationalization of Money” essay:

“I do not think it is an exaggeration to say that it is wholly impossible for a central bank subject to political control, or even exposed to serious political pressure, to regulate the quantity of money in a way conducive to a smoothly functioning market order. A good money, like good law, must operate without regard to the effect that decisions of the issuer will have on known groups or individuals. A benevolent dictator might conceivably disregard these effects; no democratic government dependent on a number of special interests can possibly do so.”

If you look at the decision to allow national banks to make real estate loans three quarters of a century ago or the S&L crisis in the 1980s, the point was jobs, jobs, jobs.  This is why the socialists in the neo-Keynesian economic camp led by Paul Krugman chatter constantly about printing more money to grow nominal employment, even if these “workers” cannot afford to buy food at the grocery story due to galloping inflation.

The other, related point to make about Mayo’s memoir is his somewhat embarrassing paean to Paul Volcker.  Like Mike, I have great personal regard for Chairman Volcker as a public citizen,  but we cannot allow the author of a book about the bad behavior of large banks to get away with this omission.  Simply stated, Paul Volcker is the father of “too big to fail.”  A former Chase banker, Paul Volcker has always been an advocate of bailouts going back to the Penn Square Bank failure.  As I wrote in Inflated:

“In his 2010 book Senseless Panic: How Washington Failed America, former FDIC Chairman William Issac confirms that Mike Bradfield, then general counsel of the Fed and now in the same position at the FDIC, demanded that the FDIC bail out Penn Square Bank, no doubt with the knowledge of Volker and other Fed governors.  Issac responded that he would if the central bank shared the cost, but the Fed balked.”

Overall, Mike Mayo deserves great kudos for writing this readable and very personal narrative of his years on Wall Street.  Like Mike, I have spent a lot of my career fighting the tendency of big banks and politicians alike to paper over the truth in the name of expediency.  Exile on Main Street is a valuable, firsthand account of why in our democracy big banks and the people who run then tend to be less concerned about creating value for investors than in extracting value for themselves.  And as long as America remains a messy, ill-managed free market system, it is likely to remain so.

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