4 Warning Signs of A Financial Disaster

4 Warning Signs of Financial Disaster (0:00)

Brian: There are four huge mistakes people make with their money that are often a precursor to financial disaster. All four of these are warning signs that indicate something is seriously wrong with your finances, and they can make your situation even worse. Some people do these things because they’re already struggling to make ends meet, but others do them because they’re just careless or don’t know how harmful these mistakes can be. Today, we’re breaking down all four of these warning signs, why they’re so bad, and most importantly, what to do instead so you can avoid financial ruin.

Warning Sign #1: Making Late Mortgage Payments (0:36)

Brian: The first warning sign of financial disaster is making late mortgage payments. According to FINRA’s National Financial Capability Study, 16% of mortgage holders made at least one late mortgage payment in the past year. That’s one in six homeowners. And I want you to realize how big of a deal this actually is. Food, clothing, and shelter are the three basic necessities of life. When you start missing mortgage payments, you’re putting one of your most fundamental human needs at risk.

Brian: Even just a single late payment can trigger a late fee, usually somewhere between 3 to 5% of your monthly payment. Late payments can also damage your credit score. If you fall far enough behind, your lender can start collection proceedings, and in the worst-case scenario, you could lose your home.

Brian: So what do you do? The best way to avoid late mortgage payments is buying a house the right way in the first place, using our 3-5-25 rule on your first home. We give you a little additional grace with only putting down 3%. Plan to live there at least five years so you’re not underwater if the market dips. And keep your total monthly mortgage costs, including your principal, interest, taxes, and insurance, at or below 25% of your gross income. A starter home that keeps your finances in good shape will always beat a dream home that leaves you broke.

Brian: And if you’re already behind on payments, you’ve got to take this seriously and get back on track. Call your lender, ask about forbearance options or a repayment plan, and take an honest look at what’s causing the problem. Because if you don’t fix it, it could lead to the next warning sign.

Warning Sign #2: Taking a Loan From Your Retirement Accounts (2:21)

Brian: That same FINRA study found that 12% of non-retired Americans with retirement accounts have taken a loan from their account in the past year. 12% may sound like a small number, but that represents a whole lot of people. And I understand why someone would want to do this. You’re in a bind. You see this pile of money just sitting in your 401(k) and you think, “Hey, I’m borrowing from myself. I’ll pay it back. It’s not that big of a deal.” But here’s why it is a big deal.

Brian: First, there’s the opportunity cost. Every dollar you pull out of that retirement account stops working for you. So if you borrow $10,000 from your 401(k) in your 30s, you’re not just borrowing $10,000. You’re preventing that money from turning into over $100,000 by retirement. You’re basically robbing your future self by shrinking your army of dollar bills. Second, if you leave your job before you’ve paid the loan back, the entire outstanding balance may become immediately taxable as ordinary income if the loan is not repaid or rolled over according to IRS rules. And if you’re under 59 and a half, you could also face a 10% early withdrawal penalty on top of that.

Brian: So what should you do instead? If you’re facing a true emergency, that’s exactly what your emergency fund is for. If it’s not an emergency but you’re trying to free up cash for a home renovation or some other large purchase, the answer is a sinking fund. Start setting aside money each month specifically for that goal. It may take time, but it’s much better than depleting your retirement savings. Your future self will thank you.

Warning Sign #3: Taking a Hardship Withdrawal From Your Retirement Account (4:00)

Brian: The next warning sign of financial disaster is even more serious, and that is taking a hardship withdrawal from your retirement account. According to FINRA, 11% of non-retired retirement account holders took a hardship withdrawal in the past year. A hardship withdrawal is even worse than a 401(k) loan because you’re not putting that money back to work. It’s permanently removed from your retirement account. And unlike a loan, a hardship withdrawal is taxed as ordinary income immediately. So if you’re in the 22% federal tax bracket and you pull out $10,000, you’re only going to net around $6,800 to $7,000 after taxes and the potential early withdrawal penalty. You’re losing a massive chunk of money right off the top, and you’re losing all the future compounding growth on top of that. It’s truly one of the most costly financial moves you can make.

Brian: If you find yourself in a situation where a hardship withdrawal feels like your only option, pump the brakes and ask yourself a few questions first. Have you fully depleted your emergency fund? Have you negotiated a payment plan with your lender or creditors? Have you cut every possible non-essential expense from your budget, like subscriptions and dining out? And have you explored any additional income opportunities? Exhaust all of these options before you ever touch that retirement account. A hardship withdrawal should be your absolute last resort.

Warning Sign #4: Overdrawing Your Checking Account (5:30)

Brian: Now, this last one might seem less dramatic than the others, but a lot more Americans are doing it. And that is overdrawing your checking account. FINRA found that 24% of checking account holders, nearly one in four Americans, occasionally overdraw their checking account. And that number is actually trending in the wrong direction compared to recent years. On the surface, overdrafts can feel like just a minor annoyance. You have a declined transaction and you have to pay an overdraft fee or a return payment fee. But it’s not just about the fees. Overdrawing your checking account is a symptom of something much bigger. It tells you that your income and your spending are not aligned and money is leaving your account faster than it’s coming in. That is always a sign of a deeper issue that needs to be addressed.

Brian: So what do you do? Start by tracking your spending, because you can’t fix what you can’t see. Make sure you’re following the Financial Order of Operations, our step-by-step plan that tells you exactly what to do with every dollar so you’re always making the right moves in the right order. Then you need to address the root cause, because the fix depends on the problem. If your income is too low relative to your bills, the priority has to be increasing your income, whether that’s negotiating a raise, picking up extra work, or building a skill that leads to higher pay. If your fixed expenses are too high, look at what you can cut or restructure, like your housing costs, your car payments, and your subscriptions. And if it’s a behavioral issue, like impulse spending, emotional purchases, or lifestyle creep, then you need to create some spending friction. Remove the shopping apps from your phone, delete your payment info from shopping sites, and use cash or debit cards instead of credit cards.

Brian: On the flip side, automate all those good financial decisions. Put your bills on autopay and automate your saving and investing contributions. Make the good behaviors easy and the bad behaviors hard.

Your Story’s Beginning Doesn’t Define the Ending (7:31)

Brian: If you’ve ever done any of these four things, it’s likely because you are really struggling with money and you might be in an even worse spot now. If that’s the case for you, I want you to hear me. These mistakes are fixable. How your story started is not how it has to end. But it’s time to get serious about your finances and you need a plan. This is why we created the Financial Order of Operations. It gives you a clear road map so you always know what to do with your next dollar. And even if you’ve made some major financial mistakes in the past, you can get back on track and start building your great big beautiful tomorrow.