8 Financial Red Flags You Must Catch Before It’s Too Late
Written by
Cindy Lamothe
Edited by
Amber Barkley
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When it comes to financial health, sometimes it’s easy to overlook certain signs. But there are some red flags that indicate you might be worse off financially than you thought.
One of these signs, according to Ann Martin, director of operations of CreditDonkey, is that if you don’t have the income to slowly build an emergency fund, you’re not financially stable enough. “There are a lot of people out there with good, middle-class jobs, who are essentially living paycheck to paycheck,” she said, pointing out that they may often even have a nice car, a nice house with a mortgage and other basic luxuries.
“They may even have some retirement savings through a 401(k), but they have essentially zero wiggle room in this setup,” Martin added. “They aren’t prepared for a sudden setback from something like a major medical expense, an unexpected home repair or a car crash.”
Here are some of the most common warning signs that someone is in bad financial shape.
Growing Credit Card Debt
If you find yourself turning to credit cards more and more frequently, it’s a sign that you’re living way beyond your means and probably don’t have much money saved for unexpected expenses or emergency situations.
Someone relying heavily on credit cards to cover everyday expenses is a red flag, said Jon Morgan, CEO and editor-in-chief of Venture Smarter. “Sure, plastic is convenient, but consistently maxing out cards or only paying the minimum can lead to a snowball effect of debt.”
Nathan Richardson, founder of Complex Search, agrees that excessive borrowing is a common indicator of financial insecurity. “Many people rely on credit cards or loans to make ends meet, but if not managed properly, this can quickly spiral out of control.” He noted that people may also be unaware of the true cost of their debts, such as high interest rates or hidden fees, which can lead to a never-ending debt cycle.
Ignoring the Numbers
Facing the reality of financial instability can be frightening, often leading people to be in denial about the severity of their situation, because they fear the consequences of acknowledging it. Ignoring the numbers allows them to maintain a sense of normalcy, even if it’s only temporary.
“Ignorance isn’t always bliss, especially when it comes to finances,” said Morgan. “If someone is avoiding looking at their bank statements, neglecting bills or steering clear of financial discussions, they might be subconsciously trying to avoid the reality of their financial situation.”
Late Payments and Overdrafts
According to Harry Turner, founder of The Sovereign Investor, missing payments on bills like rent, utilities, car payments and even credit card payments can lead to late fees and also hurt your credit score. Additionally, he says that overdrafting your bank account is another sign that you have difficulty budgeting properly, because you don’t have enough money to cover all of your necessary expenses each month.
Living Paycheck-to-Paycheck
This means that your current paycheck is just enough to get by on, covering necessary expenses like bills, food and rent. “There’s no room for saving or any other type of financial planning in this situation,” said Turner. “If this describes you, then take it as a warning sign that your finances may be worse than initially thought.”
While this may appear to be a normal part of life for some, Richardson said it can indicate that a person is not saving enough or managing their finances effectively. “Unexpected expenses or emergencies can quickly throw someone into financial trouble if they do not have a safety net.”
No Emergency Fund
The lack of an emergency fund is another key red flag for financial instability, experts say. Without that safety net, people can find it challenging to break the cycle of financial instability. Every unexpected expense becomes a crisis, perpetuating a cycle of stress and making it difficult to save or invest for the future.
“Individuals may be forced to take on more debt or cut back on essential expenses during times of financial hardship if they do not have any savings to fall back on,” said Richardson. “This can cause a downward spiral and make recovering from unexpected financial setbacks difficult.”
You Don’t Sleep Well Because of Money Concerns
“Everyone gets stressed up about money sometimes,” said Min Tom, finance specialist and CEO of Happy Hongkonger. Even with a sound financial position, she said you might be concerned about the long-term effects of growing bills. “However, if you’re having trouble sleeping because you can’t afford to pay your expenses this month, it’s probably a sign that your finances are unsteady.”
She also noted that sleep deprivation can negatively impact your life’s functioning and perhaps hinder your career. “Your financial situation will only become worse, in any case.”
Overspending as a Coping Mechanism
Unexpected changes in spending habits often reflect underlying financial issues. For example, feeling out of control of your money and turning to overspending only leads to accruing more debt as a result.
Experts note that people may want to project an appearance of success or well-being, leading them to make purchases beyond their means. They can often feel pressured to spend money on goods and experiences to match the lifestyles of those around them, even if it puts them at risk. And while retail therapy might provide a temporary sense of happiness or control, it often exacerbates long-term financial problems.
You Struggle To Repay Bad Loans
“Generally speaking, your best option is to pay off any bad debt you may have as soon as possible,” Tom highlighted. “This is debt that is losing you money rather than strengthening your financial situation.” She said it’s probably a bad indicator if you’re experiencing problems making these payments on time. “At a minimum, you might have to deal with the underlying reasons for your issues.”
Beyond that, she advises receiving professional assistance by speaking with a debt counseling agency.
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