Oran Hall | Signs of an impending personal financial crisis

We know that the hurricane season runs from June to November each year, but many wait until a hurricane or storm is heading seriously to Jamaica to begin to prepare.

Personal financial crises do not have a season, do not put the entire country at risk, do not present themselves publicly so that all can track them, but they give signs they are coming and can be avoided by people who are attentive to their financial situation.

As I write, Tropical storm, probably hurricane, Melissa is on its way. Whether it delivers a direct hit or just passes near us, the storm is expected to affect Jamaica – the extent to which will be clearer by the time you read this column. So, in the run-up to it, the supermarkets, markets, shops and water stores came under pressure as shoppers made last minute purchases to prepare for its impact.

Others also made preparations: the utility companies, relief agencies, and the government and its agencies. So did my neighbours. I am hearing the sound of chopping as some trees lose their limbs – better the trees than human beings.

Not everybody was running here and there, or panicking, for there are people who are always prepared. They have kept adequate supplies of food and medicine, have secured emergency health supplies, have protected their property, and have organised liquid financial resources.

Of course, some will say that others are prepared because they have the means to do so. But, is that entirely true?

There are those who will argue that some people will face financial head winds because their financial resources are limited. I wish I could fully endorse that. The truth is that some people with limited means do manage their financial lives well. By contrast, some people who are better endowed do not manage their resources as well as they should. Imagine how much worse off the former would have been if they had not been better managers of their resources and how much better the latter would have been with better financial practices.

Tropical storms and hurricanes give a few days for people to get ready. They may even cause people to prepare and then change course. Personal financial crises do not just announce themselves in a few days. They generally take time to develop, but the signs often go unnoticed.

Here are some warning signs of a looming personal financial disaster: struggling to pay bills on time; expenses exceeding income; living pay cheque to pay cheque; not paying financial obligations like rent, mortgages, and loans on time; using credit regularly to pay basic expenses like groceries and utilities; juggling bills by making partial payments; missing some payments; and making late payments.

Additional signs include: borrowing from Peter to pay Paul; spending income not net earned; liquidating investments; surrendering life insurance policies, withdrawing cash values on life insurance policies, borrowing against the investment values or cash values of life insurance policies, and surrendering units on insurance policies to pay expenses; and saving irregularly, inconsistently, or not at all.

In some cases, like liquidating investments or accessing the investment values of investment policies, it may not necessarily be a case of poor financial management or impending financial disaster. Quite the contrary. It could be a case of investments being made to generate funds to carry out specific plans, for example, deposit on a property, paying for a child’s education, or to fund a business.

Similarly, people may choose to use just the income that insurance policies generate or that some investments generate to meet specific spending goals.

There is a clear indication of trouble when the actions taken are the result of the need to address a bad financial situation at worse, or to address a declining financial situation.

In fairness, it is reasonable to concede that serious unplanned situations do arise: the death of a significant income earner, serious health issues, natural disasters, loss of a job, for example. Also true is that some of these situations can be mitigated by, for example, insurance, and others may just be temporary.

Nonetheless, individuals can take steps to reduce the risk of financial disasters. Here are some examples. Make a budget and stick to it with the input and support of the entire household. Cut unnecessary expenses and establish a mechanism for accountability. Maximise liquid savings to establish and grow an emergency fund. Pay bills on time and avoid late fees and financial charges.

Here are some more: explore additional income streams and sell non-cash assets that are not being used at all or are underutilised. Pay down high interest debt and avoid using credit cards if they pose too great a challenge to effective money management. Adjust your financial strategies to stay prepared, review insurance coverage, maintain physical assets, and plan for the long term.

There are many situations – bad and good – which pass. Situations are hardly self-correcting. Human effort is necessary to make things happen, and to stop things from happening. Knowing the signs of impending personal financial disaster is the first step in preventing it.

Oran A. Hall, author of Understanding Investments and principal author of The Handbook of Personal Financial Planning, offers personal financial planning advice and counsel.finviser.jm@gmail.com