Recently, I had lunch with a friend who asked me whether it made sense to keep paying down her various credit card balances or consolidate her debt and take it from there. When I asked her how much she was on the hook for, she turned red and muttered, "More than you'd ever imagine."

The ironic part, of course, is that she and her partner have good jobs, a modest house, and free child care, thanks to their retired parents, who live close by. So how did she get into this mess?

The answer boils down to ignorance and a lack of self-control. Yes, my friend earns a respectable salary, but she also drives a much nicer car than she needs to. She has a comfortable kitchen, yet she rarely uses it because it's easier to go to restaurants or order in. But the root of her problem is that thus far, she's failed to recognize how her habits are damaging her finances on a long-term basis.

Man at a computer and woman with a calculator jotting down notes, both of whom look worried


After I scolded her for not having a penny in the bank and offering to pick up the tab for lunch, I realized that she's just one of many people out there who have yet to face reality when it comes to their finances. So if you're in that camp, consider this your firm, but friendly, wake-up call. If any of the following signs apply to you, it's time to rethink your approach to spending and managing money -- before you dig yourself into a permanent hole.

1. You're living paycheck to paycheck

A frightening 75% of U.S. workers live paycheck to paycheck. These are the same people who risk racking up debt the second an unplanned bill lands in their laps. If you're currently living this way, it's time to cut back on at least one major expense to buy yourself some wiggle room for the unexpected. Maybe that means downsizing to a smaller home, or going from a two-car household to sharing a car with your partner. Either way, the key is to take your resulting savings and stick that money directly into the bank.

You also might consider getting a side hustle to build some emergency reserves. At a minimum, you should have enough money in the bank to cover a three-month period of unemployment. Now, if you're starting with $0, that won't happen overnight, but if you're willing to work a second gig that puts, say, an extra $500 a month in your pocket, you might get there within a couple of years.

2. You're not saving for retirement

It's estimated that roughly half of U.S. households have no money saved for retirement. If you're one of them, then it's time to start prioritizing your future before you lose out on critical years of growth. Ideally, you should be saving 15% or more of your income for your golden years, but if you're used to saving nothing, you're not going to go from 0% to 15% right away.

What you can do, however, is pledge to set aside $50 a month from this point onward and increase that number as your salary goes up. Keep in mind that if your employer sponsors a 401(k) plan and offers a match, contributing enough to get that free money will work wonders for your nest egg, as well.

3. You're carrying credit card debt

Most of us are familiar with debt -- we finance our homes by taking out mortgages and pay for college with loans. But while the aforementioned types of debt are almost a universal necessity, credit card debt is a completely different story. Simply put, credit card debt is the worst kind to have, and the longer you carry it, the more money you end up losing to interest. If you're saddled with credit card debt, it's time to rethink your habit of whipping out that plastic and consider moving to a cash-only system until your balance is whittled down.

4. You have no idea what your credit report looks like

Last year, 16% of Americans admitted that they had never checked their credit reports. That's a problem because it's estimated that about 20% of those reports contain errors that could bring down your score and make it costlier to borrow money for things like a home or a vehicle. If you're clueless about your credit report's contents, obtain a free copy and study it from cover to cover. And if you spot a mistake, take steps to correct it before it does further damage.

5. You don't have a budget in place

Most Americans don't follow a budget, even though it's probably the easiest and most effective money-management tool out there. Without a budget, you'll have a hard time seeing where your money is going and where you have room to cut corners, so take an hour out of your day and create one immediately. If you list your monthly expenses and find that they exceed your income, you'll know you're in trouble -- but without that budget, you may not realize the extent to which you're overspending, as was the case for my friend above.

Maintaining poor financial habits is a good way to dash your dreams of ever feeling secure in your lifetime. If your finances need some attention, stop what you're doing and carve out the time to get back on track. You'll be thankful you did in the long run.