Many of us are good at turning a blind eye to things we don’t want to face. Maybe we ignore the fact that we’re not eating as well as we should or that our car desperately needs an oil change. But one area where avoidance can be particularly costly is our personal finances.
Financial disaster rarely strikes out of the blue. Most financial crises build slowly, and often, there are clear warning signs along the way. By spotting these signs early, you can steer clear of financial trouble and get back on a solid path.
So, take a close look at these seven red flags. If any of these sound familiar, it may be time to make some practical adjustments. And don’t worry—small changes now can prevent a big headache later.
1. You Overdraw Your Chequing Account More Than Once a Year
If you’re overdrawing your account more than once a year, it’s likely a sign that something isn’t working in your financial setup. Overdraft fees pile up quickly, making it even harder to catch up. When you’re already struggling to make ends meet, those fees add insult to injury.
Why This Happens:
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Poor Money Management:
Some bills take longer to clear than others. If you’re not paying attention to what’s pending, it’s easy to overdraw.
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Overspending:
Do you have a budget, and are you sticking to it? If you’re running out of money before the end of the month, it might be time to take a closer look at your spending habits.
What You Can Do:
- Set up alerts to notify you when your balance is low.
- Review your spending weekly. It doesn’t have to be complicated—a quick check-in helps you stay on track.
- Consider using a chequing account buffer. Leaving even a small amount extra in your account can prevent those overdrafts.
- Create and follow a budget. For more information on budgets read Build Financial Success by Creating a Personal Budget.
2. You’re at or Near the Limit on Your Credit Cards
Using a significant portion of your credit limit affects your credit score and puts you in a financially tight spot. Experts advise keeping your credit utilization under 35% of your available limit. For example, if you have a credit card with a $5,000 limit, try to keep your balance below $1,750.
Why This Happens:
- It’s easy to turn to credit for purchases when cash is tight, but this can lead to a cycle of relying on credit instead of budgeting for essentials.
- Credit can be tempting for unplanned expenses. However, if you keep your card balances near their limits, this puts you in a risky position if an unexpected cost arises.
What You Can Do:
- Create a plan to pay down balances over time, even if you start with small amounts.
- Stick to your budget. Aim to cover everyday expenses without resorting to credit.
- Resist the urge to open more credit accounts. More credit won’t solve the underlying problem.
3. Relying on a Future One-Time Financial Event
Maybe you’re counting on a tax refund, inheritance, or bonus to balance things out. Relying on a single financial windfall is risky. What if it’s delayed? Or worse, what if it doesn’t come through at all?
Why This Happens:
- Sometimes, we can fall into the habit of “future” money solving today’s problems, but this leaves us vulnerable if the money doesn’t come.
What You Can Do:
- Structure your finances so that you’re stable without relying on one-time boosts.
- If you do receive a windfall, use it to get ahead rather than just getting by.
- Consider building an emergency fund to create a cushion for unexpected expenses. A good emergency fund will contain enough to cover your basic expenses for at least six months. (Even that may not have been enough during covid.)
4. No Savings
If you haven’t been able to put money into savings, it’s a sign that your expenses may be out of line with your income. It’s also risky. Without savings, even a small emergency can create serious financial strain.
Why This Happens:
- Savings is often seen as “optional,” especially if money is tight, but skipping savings creates bigger problems down the line.
What You Can Do:
- Start small. Even a small monthly amount builds up over time.
- Set up automatic transfers to your savings so you don’t have to think about it.
- Think of savings as a fixed expense—just like rent or a car payment. This way, you’ll prioritize it as part of your regular budget.
5. Borrowing Money from Family and Friends
Borrowing from family and friends can be a quick fix, but it’s a big sign that your finances need attention. Plus, it can strain important relationships.
Why This Happens:
- Sometimes, we lean on loved ones instead of addressing a deeper issue in our finances.
What You Can Do:
- Look for other solutions, like adjusting your budget, before turning to others for help.
- If you do borrow, make a clear repayment plan. Be transparent about your financial situation to avoid misunderstandings.
- Focus on rebuilding your financial independence so you won’t have to borrow again.
6. Dipping into Your Retirement Funds
Using your retirement savings to cover today’s bills is a sign that the present is stretching you too thin. Not only are you losing out on compound interest, but early withdrawals often come with penalties and taxes. See the CRA document at Tax rates on withdrawals. Note that you may be (will likely be) required to pay even more taxes when you file your taxes for the year.
Why This Happens:
- It’s easy to see retirement savings as “spare” money, especially in tough times, but this leaves less for the future.
What You Can Do:
- Avoid dipping into retirement funds unless it’s a true emergency.
- Focus on building an emergency fund that can help you avoid needing to access retirement funds.
- Find ways to lower expenses or boost income to create more breathing room in your current budget. A side gig may be the answer.
7. Using a Home Equity Loan to Fill Financial Gaps
Home equity loans may be tempting because they offer lower interest rates, but using them to pay for everyday expenses or fill budget gaps can put your home at risk. It’s a serious warning sign if you’re relying on home equity to make ends meet.
Why This Happens:
- When cash is tight, home equity may seem like a solution, but it increases your overall debt and can jeopardize your home.
What You Can Do:
- Think carefully before using home equity for anything other than investments in your home or major expenses.
- If you’re struggling, look for other ways to reduce costs or increase income instead of taking on more debt.
- Remember, if you can’t afford it now, adding debt doesn’t make it more affordable—it just delays the problem.
Recognize the Signs and Take Action
Remember, spotting any of these signs in your finances is a good thing—it gives you the chance to act before a financial crisis hits. By focusing on a few practical steps and making small changes, you can turn things around.
Financial stability doesn’t happen overnight, but the rewards are worth it. A bit of effort today can bring you lasting peace of mind tomorrow. Your future self will thank you!
Disclaimer for ManageYourMoney.ca
The information provided on ManageYourMoney.ca is intended for educational and informational purposes only. It should not be taken as financial advice. The opinions shared are those of the authors and are meant to encourage sensible financial habits and decision-making. We recommend that you do your own research or consult a certified financial advisor before making any financial or investment decisions. All investments come with risks, and there is no guarantee of success. Past performance is not a reliable indicator of future results. Always consider your personal financial situation and risk tolerance before pursuing any investment opportunities.
As always, I am not a qualified financial advisor. I just relate financial management to my own experience which may not resemble yours at all. Advice is frequently worth exactly what you paid for it. Most of mine came from expensive experiences. Jim does not provide advice on any specific investments
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