When a distant relative called me for some help with his 401k I was happy to oblige.

Anytime I can help someone save for their financial future I get excited.

Unfortunately, after several minutes the excitement wore off.

The relative had just started his new job and hadn’t even put a single penny into the 401k yet. He was reading about the benefits his 401k offered and the one that caught his

attention was the borrowing provision.

He asked me, “How do I go about borrowing from the 401k?”

Say what?

Ummm….the last time I checked you can’t borrow from a 401k that doesn’t have anything in it!

What I eventually learned was that relative had money struggles I wasn’t aware of.

It’s likely most people who are in financial trouble are aware of it, and usually long before landing in bankruptcy court or losing their home in foreclosure.

After all, a personal financial crash is almost always preceded by a long period of financial instability.

What are the warning signs you’re financially unstable?

Here are 21. If you’re affected by more than one or two of them, it’s time to step back, reassess your circumstances, and take action to reverse the trend and become financially stable.



1. You Sometimes Need to Borrow to Make Your Budget

This is hardly uncommon if your budget is too tightly stretched. Though you may be able to cover your expenses with your income alone in most months, if you find yourself needing to borrow money to cover your budget even every third or fourth month it’s a sign that trouble is looming.

It’s not a problem if you have to borrow money to cover your budget for a month in which your expenses are higher due to unusual circumstances. And if you’re able to repay the money borrowed in the following month, that’s another good sign. But if you are doing it several months out of the year, your big picture financial situation can’t help but deteriorate.

Debt is cumulative in nature, so each time you borrow, your finances are weakening – a little bit at a time.

2. Your Emergency Fund is Non-Existent or Close to Empty

An emergency fund is a pure cash account which exists for no other purpose than to cover unexpected financial disasters. If your emergency fund doesn’t have sufficient cash to cover at least 30 days of living expenses (three-to-six months is recommended), then you are living on the edge of financial oblivion.

A single large, unexpected expense, or the loss of a paycheck for even a few weeks, could quickly push you into a downward financial spiral. You may fall behind in your mortgage and other debt payments, and find yourself unable to recover.

3. You’re Maxed-Out on One or More Credit Cards

This is one of those episodes most people find easy to ignore. After all, nearly everybody has credit cards, and most have some experience with maxing-out one of them at one time or another. But this is a classic sign of being financially unstable.

While having one of the top credit cards in the USA can lead to great benefits, a credit card that’s maxed-out is a pure liability, since it represents an ongoing monthly payment, but is no longer a source of fresh credit.

The reasons for maxing-out credit cards are almost never good. And since the prospect of paying off the maxed-out card is so remote, it’s just a question of time before you will max-out a second card, and then a third, and so on.

You can start digging out of this hole by moving your balance to one of the 0 percent credit cards that are available for people who still have good credit. This way your payments will have maximum impact.

4. Your Credit Scores Have Been Dropping

When you begin maxing-out credit cards, your credit score is likely to drop. This is because your credit utilization ratio – the amount of money you owe, divided by your available credit – increases. This ratio represents 30% of your credit score calculation.

The ideal threshold on a credit utilization ratio is 30%. That means if you have revolving lines of credit totaling $30,000, you can have up to $9,000 outstanding without hurting your credit score. As you move beyond the 30% threshold, your credit score will decline, even if you make all your payments on time.

Naturally, a lower credit score will make it more difficult to borrow, and result in higher interest rates on any new credit that you do obtain. But it can also cause interest rates on existing credit lines to rise as well (current lenders DO monitor your credit!).

5. You Live in Mortal Fear of Losing Your Job

Concern over losing a job is common. But if that concern looks more like fear – as in, I don’t know what I’ll do if I lose my job, it’s probably because deep down inside you know you are financially unstable.

The loss of a job is hardly unusual in today’s economy. But that’s something you can prepare for. And if you are prepared, the job loss may not be desirable, but you won’t see it as a disaster either. The very fact you fear losing your job is an indication your underlying financial situation couldn’t handle the loss of income for even a short time.

6. You Fantasize About Having Better Finances

Most everyone wants to have better finances. But at the same time, most recognize the need to develop a strategy to make it happen. If you have largely abandoned any practical strategy to improve your finances, and mostly fantasize about how it will feel when things are better, it’s a good indication you’re financially unstable.

You may fantasize about landing a much higher paying job, getting an enormous bonus (or a sweet stock option), coming into an inheritance, or even having a winning lottery ticket. The fact you fantasize about better finances is an unconscious admission you sense a loss of control of your circumstances.

7. You’re Already Pretty Certain You Won’t Ever Be Able to Retire

We’re constantly surrounded by financial advisors telling us to prepare for retirement. But if you don’t think your financial situation can accommodate putting money away for the distant future, you might not even attempt the effort.

The end result of that inaction is you will be even more financially unstable by the time you reach your sixties than you are right now. And by then there will be fewer options.

8. You Lose Sleep Over Finances More Than Occasionally

Everyone experiences some degree of stress over finances. Even if your financial situation is solid, you can worry about large, sudden expenses, or about the impact of rising costs in the future. But if you find yourself losing sleep over your inability to pay your bills this month, it’s likely due to the fact you’re financially unstable.

Too much lost sleep can affect your ability to function in your life, and even impair your ability to earn a living. Either outcome will only make your finances worse.

9. After You Pay Your Bills You’re Broke

Even if you are able to pay your bills in full each month, if you are broke after paying them – at least in most months – it’s a sure sign you’re financially unstable.

Whatever your budget is, there should always be at least a little bit extra to put into savings and to cover future contingencies. If that extra doesn’t exist, then you’re walking a financial tightrope, where a major crisis could be waiting just around the corner.

10. You’ve Borrowed Money From Family or Friends

This is a step which people typically take when they are unable to get loans from commercial sources. The fact you have to go this route is usually an indication of serious credit problems.

While borrowing from family and friends can get you through a short-term crisis, they are generally not a source of ongoing credit. This means there may be no additional resources available to help you deal with the next crisis.

11. You’ve Seriously Considered Bankruptcy or Debt Management

It’s probably true most people research or contemplate bankruptcy or debt management long before taking the step. If you have considered either, it’s a definite sign of being financially unstable.

In fact, in many cases it’s likely that just the fact you have considered doing either means it’s past time to take the plunge.

12. You’ve Recently Been Denied Credit

The entire economy revolves around credit, which is why getting a loan is usually a fairly easy process. But if you have recently been denied credit, it’s an indication the lending system sees you as damaged goods that they are unwilling to take a credit risk on.

The same is true if you are able to get a loan, but it falls into the sub-prime category. This means your credit profile is considered to be out of bounds as far as traditional lenders are concerned, and you have been assigned to the high risk pool of borrowers.

Not only will you pay a high rate of interest for a sub-prime loan, but there will also typically be other fees that don’t exist with traditional loans, as well as prepayment penalties. Even worse, a sub-prime loan is usually the last stop before you are unable to get credit entirely.

Note: If you have been turned down by a loan, you can try peer to peer lenders Lending Club or Prosper.

13. You Avoid Money Discussions With Others – Even Your Spouse

As a defensive measure, most of us will avoid discussing subjects we consider to be disturbing. If money is one of those subjects, then it is highly likely you are financially unstable.

Many people with money troubles – even those who seem to be living well on the surface – prefer not to discuss money with family and friends. At the extreme, they may not even discuss it with their spouse. After all, money is one of the biggest sources for disagreement and conflict within marriages. You may be avoiding discussing money with your spouse as way to keep the peace.

14. You’ve Had to Delay or Eliminate an Important Major Purchase

This can be anything from replacing your TV, to the roof on your house, to replacing your car. No matter how dysfunctional the item may be, you don’t replace it, because you don’t have the money to pay for it.

At the extreme, this can also take the form of delaying a medical procedure or not getting braces for one of your children. They’re all large expenses, and you won’t be able to do any of them if you don’t have the extra cash – even if you are otherwise able to pay your regular monthly bills.

15. You Seem to Have More Stuff Than Your Income Would Suggest

In a world of easy credit, millions of people seem to have more stuff than their incomes or occupations could reasonably justify. If the amount of stuff you have, particularly the kind that’s desirable but not entirely necessary, seems excessive in relation your income, it probably points to some level of financial instability.

When I say “stuff”, I’m not limiting the word to a house full of “toys” that you hardly ever use either. I’m lumping that in with an oversized house, a car you can barely afford, a history of taking exotic vacations, and a pattern of costly entertainment, such as eating a lot of meals in restaurants.

These kinds of spending indicate a lack of financial discipline. After all, if you aren’t able to pay for such goodies out of your paycheck, it’s very likely you’re using credit to cover the cost. Ultimately, that will lead to all of the other problems I have outlined in this article.

16. You’re Planning Yet Another Debt Consolidation

In most cases, debt consolidation loans are a delusion. It’s not that they are bad in and of themselves. Quite the contrary, if you’re serious about putting an end to borrowing money, and you’re completely committed to getting out of debt, a debt consolidation loan can be the perfect tool to make it happen.

Unfortunately, in most instances that is not how debt consolidation loans are used. Most people use them as a way to periodically place a bunch of high interest credit card loans under a single new loan, with a lower interest rate, and a much lower monthly payment. But the relief is usually temporary, and the debtor is out getting new credit, on top of the existing debt consolidation loan.

Eventually, yet another debt consolidation loan will be sought, setting up the revolving debt consolidation loan syndrome. It’s often the last stop before bankruptcy court.

Getting out of debt means just that – getting out of debt. Reshuffling your debt into another form doesn’t get you out of debt. It often allows a borrower to continue on the debt merry-go-round until no other options are available.

17. Late Fees and Overdrafts Are All In a Day’s Work

A sure sign you are financially unstable is when late fees and overdraft fees start becoming at least fairly normal in your life. You may consider the payment of a small fee to be a price you are willing to pay in order to maintain greater control of your cash flow.

But the fact you have to pay them is an indication you lack the cash to pay your bills on time, and that’s a definite sign of instability.

18. You Intentionally Slide Bills Into Next Month

This is the classic robbing from Peter to pay Paul scenario. You allocate your bills from one month to the next in order to make sure that everyone gets paid – eventually. So you might pay your electric bill one month, but hold your gas bill until the following month.

This is a form of backdoor credit. You’re having one vendor extend you an informal loan for a month or so, and in exchange you will pay a late fee. If you do this on a regular basis, it means you are paying more for all the services you are using (because of the late fees). In that way, it’s not just a sign you’re financially unstable, but a financial arrangement which is making that instability even worse.

19. You Defer Maintenance Projects on Your Home and Car

It’s often said that maintenance is the first thing to go when there are money problems. If you find yourself deferring maintenance projects due to cash flow issues, it’s a definite sign you’re financially unstable.

Deferred maintenance takes many forms. It could include driving on bald tires, failing to fixed squeaky brakes for months, not fixing broken windows in your home, or not having your central air conditioner serviced.

The reason for deferring these projects is a lack of cash flow. But eventually, a deterioration in the condition can result in an even bigger drain on your cash flow. For example, failing to get your brakes fixed when you only need to replace the pads, could result in the need to replace the drums as well, due to delaying the job for several months.

20. You’re Going Without a Significant Type of Insurance Coverage

Going without insurance is another common way people deal with financial difficulties. It is a major reason why people go without medical insurance, and probably the single biggest reason they do without life insurance.

While not having those policies does save you money the short run, it can set you or your family up for a certified financial disaster anytime in the future. For example, if you have no medical insurance, a single mid-level medical procedure could put you in debt by tens of thousands of dollars, and even force you into bankruptcy.

The ultimate result of not having the coverage is a financial situation that is far worse than what you are dealing with now.

21. You’re Not Certain You’ll Be Able to Make Next Month’s House Payment

This is when financial instability enters a crisis level. Since the house payment is typically the largest single payment in most households, the ability to make the payment from one month to the next could be very uncertain. It’s also an indication of a lack of any kind of financial flexibility, since you don’t have the resources to handle even a single month’s house payment.

The complication with the inability to make a house payment is it sets off a chain of other consequences. For example, if you have a mortgage, falling behind by even one month can prove to be a deficiency that you are unable to make up for many months. It could be your mortgage will be at least 30 days behind for the foreseeable future. And in some states, falling behind by no more than 60 days could legally entitle a mortgage lender to initiate foreclosure proceedings.

The situation is even worse if you’re a tenant. If you’re unable to make your payment in any given month, you could face eviction in a matter of weeks. That’s why this one of the more important warning signs!

The purpose of these warning signs isn’t to scare you (OK, maybe it is – a little), but rather to help you to see the signs early, before they turn into a full-blown crisis. If you’re experiencing several of these warning signs, use it as a call to action. For example, just by building an emergency fund with at least 30 days of living expenses in it will make most of these problems go away. And that should give you all the motivation you need.

Being financially unstable isn’t a death sentence – it’s a condition you can definitely fix. But before you can, you have to know the signs, and be ready to take action.

That should be the real take away from this list!

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