7 red flags you're about to make a bad financial decision

Don't ignore these warning signs of money mismanagement or financial risk.

  • By Geoff Williams,
  • U.S. News & World Report
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If you've made poor spending decisions in the past or developed lackluster money-management habits over time, you've probably tried to figure out where things went south. The reality is there are often warning signs that you were about to stumble into something financially unwise.

The next time you're about to make an important decision regarding your finances look for these seven red flags, and learn how to grow from previous financial pitfalls and budgeting errors.

1. Making decisions under pressure

If you're making a financial decision under duress, that's a bad sign, says Josh Elledge, the founder of the couponing and money-saving website, SavingsAngel.com.

"Unfortunately, a lot of bad decisions are heavily influenced by time and pressure. If you're faced with a financial decision where anyone is pushing you to decide quickly – and in a way that favors them – don't ignore that red flag," he says.

"High-pressure phrases like, 'this limited-time offer could end at any moment,' 'hurry before time runs out' and 'I can only offer this special deal today' should immediately result in a hard stop. The reality is, if the deal is right - it will be there after you've slept on it and considered all the angles," he adds.

Last, when you're under pressure, scammers often strike. So, if you're in a situation where someone is pressuring you to spend, you might be about to get bilked out of your money.

2. Money is tight

If you're stressed about factoring the cost of a purchase into your budget, it can be a red flag, Elledge says.

"Any financial decision that endangers your daily living expenses or brings on too much debt is a red flag," he says. "And if someone else is having to talk you into it – saying that they can help you get financing or that you can handle the payments – walk away," he adds.

3. It sounds too good to be true

If you think a purchase or investment sounds at all suspicious, pause for a moment before taking action.

"Like 99.9% of anything related to finances, if it sounds too good to be true it probably is," says Shaun Melby, a certified financial planner who owns Melby Wealth Management in Nashville, Tennessee.

"There's no get-rich-quick solution. To build wealth, it takes a long-term time horizon and hard work," he says.

4. You have to justify your rationale

Beverly Miller, a personal finance coach in Saxonburg, Pennsylvania, says one sign you're making a decision you'll later regret is worrying about what other people will think. If you're afraid to tell family members about your decision, that's a telltale sign, Miller says.

Another sign is receiving negative feedback. When "people you trust are advising you against it, and you are rationalizing why it's OK in your case" Miller says that's a red flag.

5. It’s only a good choice if everything goes as planned

Maybe you're trying to justify taking out a huge loan or giving a relative money for a new business. But before you act, consider potential risks.

Miller says people often make a financial call that makes sense "only if everything else in your life works out perfectly – you never lose your job, you get that big bonus, the market keeps going up, your rental always has the ideal tenant, that type of thing."

But if your job is new, your big bonus isn't guaranteed and your long-term savings depends on the market going up – and you're relying on an unassured outcome, hold off on making that decision.

6. You haven't considered the consequences of your decision

Shahen Derderian, a Los Angeles-based certified public accountant and registered investment advisor who owns Shahen Derderian and Associates, advises thinking through the repercussions of any money-related decision.

"If you're choosing to purchase an item but aren't sure how you're going to pay for it, you're making a bad financial decision," he says.

He points out that buying something on your credit card "and justifying the charge by saying you will worry about paying off the debt eventually" is a case in point. If you spend money just hoping things works out, you need to take a step back and make a plan.

7. You haven't done your homework

Say you're buying a house or you're applying for a credit card. Have you read the fine print? Do you really understand what you're doing?

If you don't, that may be a problem, suggests Len Hayduchok, a CFP and the CEO of Dedicated Financial Services in Hamilton, New Jersey.

"You're making a mistake if you can't explain to someone else why you made the financial decision (including) how the instrument works, how you benefit from it, what its good features are and most important, what its bad features are," he says.

"Every financial instrument, product or decision has good and bad aspects," he adds. "You must know both."

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