8 signs you're headed for financial disaster

You're underinsured. If your job doesn't provide adequate health insurance, you need to look for another job. In the meantime, read "A survival guide for the uninsured." Also check the liability limits on your auto, home and/or renters policies. Liability coverage protects you if you get sued; if your policy limits aren't high enough, you risk losing much of what you own plus big chunks of your future income. Make sure the limits are at least equal to your net worth (what you own, minus what you owe). Finally, if you're a homeowner, read "Is your home underinsured? 8 key points" and adjust your coverage limits if necessary.

Your business (or rental property) is losing money. As a fellow business owner, I understand how much you want your venture to succeed. But too many months of red ink will sink not only your business but your personal finances as well, especially if you're using your personal credit or savings to stay afloat. Come up with a plan to fix the problem and set a (relatively short) deadline; if your business isn't generating positive cash flow by that deadline, pull the plug.

Face the facts

You're ignoring an elephant. This catch-all refers to any big, ongoing money problem you're consciously avoiding or pretending doesn't exist. Maybe you've got a car payment you're struggling to pay (read "The real reason you're broke"). Or you've got adult kids (or parents) constantly turning to you for financial help (read "Should parents bail out their adult kids?" or "Should you bail out your parents?"). Or you're retired and your nest egg is shrinking faster than you'd planned (read "Retire on a wounded portfolio").

Whatever the problem, you need to assess the toll it's taking and find a solution before you're backed into a financial corner.

Speaking of corners, any of the following are good indications you're already in one:

You're borrowing from one lender to pay another. This includes using cash from one credit card to pay another, but it also includes tapping your home equity to pay off credit card debts if you don't have a plan for avoiding credit card debt in the future.

You've missed a payment on any loan. Skipping a payment, or failing to pay the minimum specified, is a very big deal. Missing even a single payment can knock 100 points off your credit scores and trigger higher interest payments on your credit cards. Fall much further behind and you could face collection actions, lawsuits, repossession (if you're late on a car) and foreclosure (see "Facing foreclosure? 9 options"). Don't wait until things get awful; fix them while they're still just bad.

You've taken out a payday loan. The payday loan industry would love you to believe that borrowing money at triple-digit interest rates is a normal and reasonable thing to do. It's neither. If you're borrowing from payday lenders, your financial house is on fire and you need emergency help. A legitimate credit counseling agency (one associated with the National Foundation for Credit Counseling, for example) can provide budgeting help as well as debt repayment plans.

Liz Pulliam Weston is the Web's most-read personal-finance writer. She is the author of several books, most recently "Your Credit Score: Your Money & What's at Stake." Weston’s award-winning columns appear every Monday and Thursday, exclusively on MSN Money. She also answers reader questions on the Your Money message board.

Updated June 16, 2009

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