The Red Flags to Watch for in Financial Health

In all aspects of life, we benefit from an ability to anticipate problems before they happen. Whether it’s in your relationships, your job, your health, or simply during your daily commute to work, you know instinctively to keep your eye out for potential red flags. Your well-being or your safety may depend on it.

Our personal finances are no different. You must be constantly vigilant to spot red flags that will negatively impact your financial situation if left unattended. The ability to spot early warning signs can benefit not only you, but also the people you care about.

Here are 10 red flags to watch out for when analyzing your financial health.

Living beyond your means

The time-tested adage to “live within your means” is certainly wise counsel, but the statement alone has no practical advice on how to do it.

Figuring out how much money you need to bring in maintain your lifestyle is a good start. But you can gain a deeper understanding by asking yourself some simple questions. For example:

• Lifestyle changes. Will you still be living within your means if a lifestyle change or unplanned event requires you to meet new financial obligations?
• Budgets. Do you have a budget that you, and in some cases your family, will stick to? Do you know beforehand how each purchase will impact your budget?
• Spending habits and impulse buying. How often do you check your budget and decide to forego an expense, or wait until a better time? Have you ever used shopping as a means to escape boredom or stress?

These problems are not limited to people in one income bracket. All kinds of individuals and families struggle to live within their means, increasing their expenses each time their income goes up, leaving themselves with inflated lifestyles and very little financial wiggle room. There’s even a name for this phenomenon: it’s called Lifestyle Inflation or Lifestyle Creep.

Tax Issues

Most people would prefer to spend as little time as possible thinking about their taxes. But not knowing the details of your tax situation is a potential red flag warning of financial distress down the road. Even a little extra attention and planning can go a long way in reducing the stress of tax season.

Keeping accurate records is key, particularly if you’re self-employed, a small business owner, freelancing, or have a side gig. The ability to access your information quickly, and understand it, is a sign of financial health.

Your tax situation changes as your income and life circumstances change. For example, events like having a baby, sending a kid to college, or donating to charity can impact how much you owe and what your return will be. Use whatever means you can to stay informed about how to pay and how much you owe, such as contacting a professional or using an online tax service.

Misuse of credit

Building a well-rounded financial picture requires a lot of tools, and credit is one important part of that tool belt, when used properly. Some warning signs of misusing credit are:

• Relying on credit too often. Paying in small installments for large purchases is commonplace. If you find yourself relying on it for smaller purchases and necessities, however, that may be a red flag to keep an eye on.
• Overdrafting. Going over your credit limit, if not swiftly dealt with, can have ripple effects on your credit. It can show up on your report and hurt your credit score, both of which will be visible to future lenders.
• Frequent loan consolidations. Consolidating debt is not universally a bad idea, but if it happens frequently, there may be underlying causes that need to be addressed early.

Changing the way you use credit may be painful at first — habit forming almost always is. The results are worth it.

Overuse of credit

Using credit is ubiquitous; whether or not you’re “overusing” credit can be subjective. But a few red flags can indicate you rely on it too much. Here are some questions for a self-assessment:

• In a world where you were forced to only make one-time payments in cash or debit, which of your expenses would you be able to maintain? Which would you not be able to make?
• How high are the interest rates you are paying?
• How often do you use your assets as collateral on loans?

Because everyone has a different tolerance for financial risk, you must perform your own assessment of whether you’re overusing credit or loans. Approaching a consultant or confidant to help you deal with areas of ambiguity never hurts.

Poor money management

An MNP Debt survey from 2021 found that 53 percent of Canadians have $200 or less standing between them and not being able to meet their monthly expenses. That is a surprising statistic, and it shows that financial red flags are perhaps more common than we think.

On a personal level, barring an unforeseen financial emergency, your expenses should leave room for you to set some of your income aside regularly. Even if it starts out as $200 or less, a growing nest egg is a good sign you’re staying within reasonable parameters.

If you find that making minimum payments on debt is the norm, or that you are regularly borrowing from friends and family, waiting to act may lead to more difficult decisions in the future.

Not budgeting or planning

This red flag goes hand in hand with living beyond your means. In order to live within your means, and catch yourself before spending gets out of hand, you need to understand what “your means” really are. That’s the main purpose of budgeting and planning.

Financial planning is not a simple task — some professionals dedicate their entire careers to helping others do it. But whether you seek outside counsel or come up with your own budgeting solution, any plan is better than no plan at all. A spreadsheet with basic formulas to add total inflows and outflows of cash is a good place to start. There are also numerous apps — many of them free — which can help you have visibility on what’s happening in your accounts.

Planning is about figuring out what you want to happen, as well as what could happen whether you want it to or not. Once you have the essentials of tracking your spending nailed down, then comes the time to plan for insurance, emergencies, and retirement.  

Co-signing or not understanding what you’re signing

An unfortunate reality is that while most lenders have your best interest at heart, some may inadequately explain what you are signing and try persuading you to proceed anyways. Be sure to read carefully and understand the interest, payment terms, and penalties. If the person across the table seems pushy, desperate, or dismissive of your questions and concerns, that should serve as a red flag warning you to take your business elsewhere.

Also be mindful of how often you require a third party to co-sign as you try to obtain new credit. Seeking out a third party occasionally can be prudent. But when someone else is involved, always question whether the loan you’re seeking is truly necessary, and make sure you are confident in your ability to pay.

Avoiding the issue

Personal finances are certainly not a comfortable topic of conversation, especially if your situation is tenuous. But being honest and open with the right people is key to financial stability. This applies to finances just like other aspects of life: avoiding the issue is usually a warning sign, to you and those around you, that something isn’t right.

If you begin ignoring phone calls, making excuses, and avoiding tough conversations with those who are impacted by your financial choices, take a step back. All of these are red flags.

A particularly tricky scenario is when you are not the only one with access to the same pool of funds. Partners, spouses, teenage children, and even business partners may draw from the same account. Ensure you are on the same page with these people about your financial realities. If you avoid the conversation because it’s difficult, others’ mistakes may become your problem.

Personal struggles

Our finances impact aspects of our lives which, on the surface, can seem unrelated. It has been well documented that money is one of the most, if not the most, common cause of stress and anxiety in the developed world.

Financial stress can directly or indirectly lead to:

• Substance abuse
• Damaged relationships
• Medical or emotional problems
• Impulsive or drastic decisions

Being aware of these red flags, both in yourself and those you care about, can make all the difference. Seeking help is often the best first step you can take.

Creditor or collection calls

These more dramatic red flags appear later on the path; ideally spotting the more subtle red flags earlier on the path can prevent you from reaching this point.

Frequent communication from collectors serves as writing on the wall for future actions — such as court judgments, wage garnishments, and asset seizures. All are avoidable with the proper tools, and in some cases, with the help of an advisor or licensed insolvency trustee.

We’re here to help

Nobody will go through life without experiencing misfortune. What separates those who experience stability and peace of mind is their ability to act when they see early waring signs. MNP Debt can help you spot red flags in your finances and tackle small problems early.