Personal Finance

Financial warning signs: Are you prepared for the worst?

A lack of money is never a problem. It’s a symptom of a problem.” – T. Harv Eker

Over the past few weeks, I’ve talked to a number of people who thought they were doing well financially until they got side-swiped by something unexpected that made them realize that things weren’t as stable as they’d assumed. Some were angry, some were scared and some were still in denial about their own role in the whole thing. However, for each person, when we took a closer look at their situation, it became very clear that the warning signs had been there for a while. Just like on the dashboard of a car, their financial “check engine” light had been lit up like a Christmas tree and, either they hadn’t noticed or they’d deliberately ignored it in the hopes that it would somehow fix itself and switch off.

Related article: Are you prepared for a financial disaster?

This is something that people do all the time and if often has unhappy consequences. I’ve been guilty of it myself in the past (and paid the price in spades) and so, over the next couple of posts, I thought I’d put together a list of 10 financial warning signs that suggest you might need to take a closer look at your financial engine before it stalls and leaves you in a challenging situation.

#1: More month than money

This should be a logical indicator that perhaps all isn’t as well as it could be on the financial front. However, if you have access to credit then it might not be as obvious as it should be that something is wrong. In the same way that constantly adding air to a leaking tire doesn’t fix a puncture, filling in the financial gaps with credit won’t fix the fact that not enough is coming in to cover what’s going out. If your bank balance is barely positive (or heading into the negative) a few days before payday, that’s a warning light you should be paying attention to.

Related article: Do you know how much you spend?

#2: Derailed by unexpected expenses

As my dad has very wisely pointed out to me over the years, there will always be expenses that you haven’t planned for. That’s just the way life works. However, if you don’t have any extra money set aside for those unexpected expenses it doesn’t take very much to send you into a financial tailspin that can be tough to recover from. If the thought of paying for a new furnace, an unexpectedly high hydro bill or covering the cost of a vehicle repair makes your palms sweat, then there’s a good chance that you need to find a way to save a little more so that you have a buffer zone to cushion you from the unexpected.

#3: Looking at payments, not prices

A friend told me excitedly how she’d just traded in her two-year-old car for a brand new one and she’d actually saved money in doing so. When I asked how she’d managed to do that, she happily informed me that her monthly payments were $25 less bi-weekly and she had a brand new car. When I asked her what the trade had cost her she looked confused because in her mind, it hadn’t cost her anything. However, a closer look at the paperwork revealed that all the fees connected to her change of vehicle had been quietly rolled into her new financing deal and her payment term had been extended by three years. Suddenly her “deal” wasn’t quite so much of a bargain after all.

We live in a society where financing has become increasingly common and so, too often, people find themselves judging the affordability of items on the payments and not on their actual price. Financing a vehicle over 84 months instead of 48 doesn’t make it cheaper; delaying payment on your furniture for 18 months doesn’t save you money (especially if you’re not able to clear the balance before the due date and the backdated interest costs are applied). All these options really do is make it much easier for people to commit to buying something that they wouldn’t necessarily be able to afford otherwise and create an opportunity for retailers to make a lot of money from administration fees and interest charges along the way.

I’m not saying that you shouldn’t finance things but you should be aware that, if you judge your ability to pay for things based on the minimum payment rather than the total cost, then you could be setting yourself up for financial hiccups down the road.

Related article: How to reduce your debt?

#4: Justifying spending

I’m a firm believer that, if you have the means to pay for something and you’ve taken care of your bills and met your savings goals then you shouldn’t have to justify that purchase to anyone. Life is too short to live small and if what makes you happy is a purple gorilla named Bob, a trip to a remote Amazonian outpost or a particularly indulgent latte and you have the means to pay for it then who am I (or anyone else for that matter) to say that you shouldn’t have it.

However, if you’re constantly telling me that you can’t afford to eat out, risk losing your home because you’re behind on bills and might have to exist on beans and rice because the AC broke in your car and then you announce that you’re taking a trip to Cuba, have front row concert tickets and purchased a truck full of patio furniture (all, because you needed a treat/have been wanting to go for ages/, couldn’t pass up a great deal) then I’m going to suggest that your financial priorities are more than a little out of whack!

It’s important to make sure there’s a little fun in your budget but it’s also important to make sure that your fun factor doesn’t tip you into the financial disaster zone. If you find yourself constantly justifying your spending, whether it’s to yourself or others, then you might want to take a step back and consider whether you need to rein things in a little in order to get your finances under control.

#5: No contingency fund

If you’ve read some of my earlier posts you may know that I don’t like the term ‘emergency fund’ because it makes me feel as though I’m manifesting emergencies! I much prefer the phrase, contingency fund because a contingency could be something interesting as well as devastating. However, no matter what you call it if you don’t have a pool of money set aside that you can dip into if things get tough financially, then you’re likely more vulnerable than you realize.

Most experts suggest that we should have at least 3 months’ worth of income or 3-6 months of expenses set aside for contingencies. For the majority of Canadians, their contingency fund is a line of credit or a credit card and the only savings they actually have are their RRSPs. That’s not ideal if illness, job loss or something else expensive hits you. Having to take on debt or cash out retirement savings when things get tough adds a lot more stress to an already stressful situation, and it can take a long time to recover from financially. If you don’t have significant savings outside of your RRSP or pension plan then it’s time to think about how you can start setting money aside to cushion yourself from life’s curveballs.

If funding an account that could cover 3-6 months’ worth of expenses is out of reach for you right now, don’t let that discourage you from saving. Even setting aside a few hundred dollars can give you peace of mind and if you can muster the discipline to save a few hundred then you’ll be able to save a few thousand down the road. Not many people fully fund their contingency accounts in months, for most people it takes at least 2-3 years. Just like the story of the tortoise and the hare, it’s slow and steady that wins the race, especially when it comes to finances.

#6: No slush fund

This may sound like a repeat of point #5 but it’s one that’s worth making. If you don’t have money set aside for the unexpected then you are incredibly vulnerable. Life is unpredictable, things happen that we’re not expecting and expenses crop up that we haven’t planned for. To help deal with this, it makes sense to have about $1,000-$1,500 in a savings account that you can use to ‘fill in the gaps’ in your day to day spending. The idea with a slush account is that you dip into it when you need to and then top it up in the months where you don’t have as many expenses.

#7: Avoiding tracking expenses

Understanding your cash flow is one of the key habits of financially successful people. If you don’t know how much is flowing in and out of your pockets each month then you make it incredibly hard to manage your spending and maximize your savings. Tracking doesn’t have to be time-consuming and with all the recent advances in technology, there are plenty of ‘apps’ that will help you take control of your money without taking on a huge time burden. If you’re not tracking your cash flow then there’s a good chance there are warning lights flashing on your financial dashboard that you won’t even be aware of until it’s too late.

#8: Juggling bill payments

There was a point several years ago, in the middle of my financial disaster period that I felt like I was constantly asking myself which bills had to be paid right away and which ones could be left for a little longer. Late fees, reminder letters, and calls from creditors were a far too frequent reminder that I was in way over my head and in danger of drowning. I would pay bills in a certain order so I could “recycle” my payments and use the money that I had just paid onto a credit card or line of credit to pay another bill; a strategy that left me constantly nudging at the edges of my credit limits and pretty much shut down any hope I had of getting the debt under control. Eventually, a change of perspective, a change of strategy and a lot of really hard work allowed me to dig myself out of the hole I’d sunk into and create a much stronger financial reality for myself. However, I’ve never forgotten those horrible years of constant struggle and every time I meet someone in a similar situation, I feel a tug of empathy because I know how hard it is to be there. If you’re not in a position to pay all your bills in full and on time every month and to make more than the minimum payments on your debts then that’s your warning light. It’s time to figure out a way to restructure your situation and locate the motivation to make a change.

#9: Relying on payday loans

There’s a reason why it’s so easy to get a payday loan and a reason why one of the first questions they ask you when you go in to repay it is “do you want to re-loan?” Short-term loans are incredibly profitable for the lenders and the interest rates are so high that, for someone living paycheque to paycheque, the only way to cover the interest is to take out another loan. If you’re caught in the payday loan cycle then make it a priority to sit down with one of the non-profit credit counseling agencies and figure out a plan to pay off the debt in a realistic time frame at a more reasonable rate of interest.

#10: Hiding the truth

Feeling the need to lie or stretch the truth about your financial situation is a solid clue that all may not be well in your financial world. If you find yourself avoiding activities with friends that involve spending money and/or choosing not to tell your partner about overspending, unpaid bills or other financial challenges, then that’s another warning sign that you might want to pay attention to.

One thing I’ve learned in my own financial journey is that being honest with myself about my situation is key to being able to improve it. Making excuses to explain away one ‘hiccup’ after another and/or deluding myself about the truth of my finances to make myself feel better only made things much worse in the long run. The reality is that nothing is so bad that it can’t be fixed. However, unless you’re lucky enough to get a sudden windfall, the fix won’t happen overnight and it will likely involve some hard choices and a good dose of self-discipline. One key benefit to deciding to set things right is that there’s a huge sense of relief that comes from facing reality, coming up with a plan and putting it into action. If the warning lights are flashing in your financial life then you owe it to yourself to pay attention and figure out a way to overhaul your finances before you find yourself facing a financial breakdown.

Are you in denial?

All too often, when things go bad financially, it comes as a shock. While there’s no way to predict when a financial disaster such as a job loss, illness or unexpected expense might strike, it makes sense that those people who are in a solid financial situation will be better equipped to weather the storm than those whose financial health is a little shaky.

If you identify with some (or all) of these financial warning signs, don’t feel bad. The key factor in determining whether you will succeed or fail when it comes to finances is not what you’ve done in the past but what you do with the knowledge that you’re in the financial danger zone. Some people will opt to bury their head in the sand; blaming outside factors for the situation and calming themselves with the thought that “it will get better when…” while others will decide that enough is enough and opt to learn from their past choices and make a change for the better. I challenge you to make the change and I promise that, down the road, you’ll be really happy that you did.

Having ignored the warning signs in my own life (and paid a steep price for it) I know first-hand how tough things can get when life gets stormy so I thought I’d share some common warning signs that your financial ‘check engine’ light might be flashing.


  1. Kathy

    Great article Sarah!
    I see many people confuse emergency funds with just life happening.
    New tyres or glassess are not emergencies we should plan for them on a rotation

    • Sarah

      I totally agree Kathy! Unfortunately, we’re taught to see credit as a safety net instead of the debt trap it is. Knowing that anything that crops up can be charged and paid for later takes away the incentive to put aside money for predictable expenses but it makes people incredibly vulnerable because they have no savings. I’m glad you liked the article : )

  2. Tikiri

    What an insightful, articulate amazing post this was. Wow Sarah, you hi the nail on the head again, again and again. I used similar tactics and change in mindset to get to where I am now – zero debt with have everything I need – from a lovely little seaside condo, a solidly built nine year old car, good hardwood furniture that will last a lifetime to classic clothes that will stand the test of time etc.. etc… I really will never need to go shopping again ever – except for where to invest my hard earned savings. I have planned carefully, negotiated everything and put my mind to it, from savings to investing. For someone who cleaned toilets to put myself through my first degree at 19, I don’t think I’ve done too shabbily – and if I can do it, so can anyone. Now I only wish I could share your post with friends who giddily plan vacations, cottages, brand new cars etc…etc… but worry about paying for healthy organic groceries because they’re “too tight.” Hmmm…. Well, to each his/her own I guess.

    • Sarah

      Thanks so much for the feedback Tikiri! It sounds as though you’ve worked really hard to get where you are (both physically and psychologically) and it’s paid off. I’m really glad that this post resonated with you : )

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