5 Signs You're Heading for a Financial Crisis

These red flags need to be dealt with right now.

Everyone hopes a financial crisis won't happen to them, but we don't always have control over what expenses life throws our way. The best we can do is try to plan for the unexpected and stay alert for signs that indicate we might be in a little over our heads. Here are five signs to watch for, along with steps you can take to avoid a serious financial crisis.

1. You don't have an emergency fund

Without an emergency fund, a single large unplanned expense can destroy your financial security in one blow. You might have to take on debt in an emergency and if you don't have a lot of extra cash every month, it could take you months or even years to get out of this cycle. 

2. You borrow money from others often

If you cannot keep up with your bills, you might look to family members and friends to help you. Borrowing from them once may only indicate a temporary setback. But if you find yourself repeatedly asking for money, especially if you need more before you've paid back what you've already borrowed, that's a good sign that you're in real trouble. Eventually, your family and friends may stop lending you money and then if you fall behind on your bills, you'll owe creditors too, and they're not going to let it slide.

3. You put a lot on your credit card

If your family members are unwilling or unable to lend you money when you need it, you might turn to other forms of credit, like a credit card. This enables you to buy the things you want or need now while giving you a little extra time before you need to pay for them. The trouble is credit cards usually have high interest rates and if you cannot pay your balance back in full at the end of the month, the outstanding amount will begin to accrue interest. This can drive your bills up over time, making them more difficult to keep up with.

4. You've taken out loans to pay for other loans

This is especially common among those who have resorted to payday loans. The outrageously high interest rates make these nearly impossible to pay back, so many people end up taking out new loans to pay back their old loans. This becomes an exponentially more costly cycle that continues until you're no longer able to keep up with your payments at all. 

5. You can't always pay your bills on time

Paying a bill a day or two late might not seem like that big of a deal. Your lender probably isn't going to report your late payment to the credit bureau at this point. But if you can't pay on time, that's a sign that you could be headed for more serious financial trouble. As your payments get later and later, eventually they'll start hurting your credit score, and this can make it more difficult for you to borrow more money in the future.

How to prevent the downward spiral

Build an emergency fund if you don't have one already. This will help you avoid debt and keep your regular budget intact when an unexpected expense arises. Aim to save at least three months' worth of living expenses, or six months' worth if you want to be extra safe. You may want a separate bank account to keep this money apart from your other savings. Figure out how much money you need and how much you can spare each month and set this aside until you reach your goal. Always replenish your emergency fund after you use it and reevaluate it once per year or after a major life event to decide if you need to increase your savings.

If you're already in the cycle of debt described above, you need a plan to get out of it. Your exact plan will vary depending on how much you owe, who you owe it to, and how much money you can spare every month for debt repayment. For credit card debt, you might be able to use a balance transfer card to temporarily halt the growth of your balance. Or perhaps a personal loan with a regular monthly payment could help you get back on track.

Cut back your spending as much as possible to free up the cash for debt repayment. You could also try working a little extra to increase your income. If that is not possible, reach out to the lender to see if you can come to some sort of payment agreement. Hospitals, for example, are often willing to help you set up a payment plan for medical bills so you don't have to pay them back all at once. 

If you really can't pay what you owe, you might be able to try settling your debt. This is where you tell the company what you can afford to pay and if it agrees, it'll write off your remaining debt. This can get your creditors off your back, but it will probably hurt your credit and other lenders might be hesitant to work with you in the future. Think carefully before you do this and only go that route if you have no other good options.

You can also seek the help of a credit counselor if you aren't sure how to get yourself back on a stable footing again. Credit counseling is typically a free service where a counselor will work with you to come up with a debt management plan and connect you with tools and resources to help you get out of debt more quickly. Make sure you choose an organization accredited by the National Foundation for Credit Counseling.

Avoiding a financial crisis or getting out of one if you're already there depends largely on why you ended up in that crisis in the first place. It's best if you can catch the warning signs listed above before things become too serious. If any of them apply to you, start working on a debt management plan right away before it gets any worse.