My friend had a stable job making $85,000 a year with moderate debt that included a mixture of credit cards and student loans. He lived a comfortable lifestyle often eating at fine restaurants and traveling. He shared recently that his situation has changed.
My friend who was never late on bills was now facing some financial issues. He shared his stress from the creditors’ phone calls. “It came out of nowhere,” he states, ” I thought I was managing my money very well.”
For many people making $85,000 a year would be a financial windfall but my friend was living paycheck-to-paycheck. My friend believed he would always make more money. He was ill-prepared for an unexpected driving violation that came with a hefty fine sending him into the financial abyss. I shared his story in more detail in my national bestselling book, You Only Live Once.
My friend never saw the red flags during those blissful years of “financial indulgence.” And he hadn’t considered one emergency would lead to a financial meltdown.
That’s why it’s important to always have a plan because it’ll lessen the impact of financial uncertainties that are sure to arise at some point. Just know it’s not too late to create financial security for peace of mind.
Here are ten financial warning signs that might indicate you are headed for financial trouble.
1. You associate savings with purchases and not with a savings account.
Buying things at a discount is good but not saving money for short, mid and long-term goals can mean disaster. Start an emergency fund to cover unexpected expenses. If you find saving money is challenging, then use savings automation and artificial intelligence to help you.
2. You don’t know how much debt you have.
The biggest hurdle preventing many from achieving financial security is not knowing the total amount of debt owed. Start by accessing your free credit report and review your outstanding debt obligations. Then, calculate your debt-to-income ratio.
3. You have credit cards that are near or above the limit.
Making only the minimum payments on your credit card will compound the debt over time and become increasingly difficult to manage. Read your credit card statement and find the statement box that shows how additional payments added to your minimum monthly payments can help you pay off your credit card balances in 3 years.
4. You make late payments on bills or paid a checking or debit card overdraft fee.
Making a late payment on a bill can be an overlooked error. But after 2 missed payments it may underscore the reality you’re living beyond your means. Paying fees for overdrafts or nonsufficient fund fees indicates issues in managing your cash flow. Set withdrawal alerts with your bank to notify you when funds are taken from your checking account. Also, use a financial tracking app to help you manage your spending.
5. You carry a revolving balance on your credit cards.
Carrying balances on credit cards month-to-month can lower your credit score. Thirty-percent of your credit score is derived from your credit usage (the ratio of used credit to available credit). Check your score by using a free credit score app. And find ways to earn extra cash to pay down balances.
6. You use credit card checks or cash advances to pay your bills.
This credit card feature costs more money from extra fees to higher interest charges. It may seem convenient but can add to your debt load. Consider consolidating credit card debt to lower minimum payments and the total cost of borrowing. But continuing paying as much as you can on the debt.
7. You were turned down for a credit card or loan.
A credit denial is an indication that lenders may find you a higher risk and have overextended yourself. Lenders review your credit report and credit score to determine your creditworthiness. They are assessing your potential risk of default or bankruptcy in a few years. Stay on top of your credit and use a free credit monitoring service.
8. You borrow money from your 401(k) to pay for monthly expenses.
Your 401(k) is part of your retirement strategy focused and not meant for debt repayments or monthly expenses. Withdrawing from a 401(k) loan means more financial losses with penalties and fees. Instead, find ways to reduce your expenses, negotiate your bills, consolidate debt and earn more with a side hustle for extra income.
9. You believe the lottery is your path to retirement.
You have a higher chance of being struck by lightning than winning the lottery. Your retirement should include a robust savings and investing plan that includes 401(k) contributions, IRAs, brokerage accounts, and life insurance. Get in the habit of long-term investing. Many brokerages offer accounts that invest your change, buy index funds for as little as $5, or buy fractional shares. Check the financial marketplace for the best products that fit your needs.
10. You hide your financial situation from your partner.
Lying about your spending habits, debt and hiding bill statements will cause more grief down the road. Money can erode the strongest bonds among partners causing arguments and divorce. Break the social taboo about money with your loved one. Set up a financial date checkup once a month.
If you find yourself agreeing to a few of these, it might be time to sit down and assess your financial situation completely.