Posts tagged with ‘common causes of debt’
Spend less than you earn, and you’ll never be in debt. It seems like a simple concept, so why is consumer debt such a complex issue?
People can fall into the ranks of the red for a number of reasons. Here are the top 10 most common causes of debt:
1. Reduced income/ same expenses. Whether you’ve been laid off or received a pay cut, many people delay adjusting their spending when their income decreases, and they fill in the gap with debt. The sooner you adjust to your new reality, whether temporary or permanent, the better off you’ll be.
2. Divorce. More than half of those who marry end up in divorce court, and many more than once. Divorce is expensive no matter how you slice it. All fees aside, regular expenses nearly double. The assets and future income now pay for two households, rather than pooling everything into one pot that pays for one streamlined abode.
3. Poor money management. Planning your spending is no more difficult that writing down your expenses and income and reconciling the two, yet many don’t do this and have no clue where there money is going. You could be spending hundreds of dollars unnecessarily each month and up having to charge purchases for which you could have paid cash.
4. Underemployment. Like those facing reduced income in reason No. 1, those who are underemployed may see it as temporary and even see underemployment as a false sense of relief compared to unemployment. Again, it’s imperative to get your expenses in line with your current income, not anticipated income. Down the line, if your income increases due to more hours, a second job or a better job, then you can increase your budget.
5. Gambling. The house always win, but gamblers always play. Simply put, gambling is addictive.
6. Medical expenses. Medical treatment is expensive, and the need for it can be unpredictable. The medical industry wants to get paid at the time the service is rendered, knowing that if they don’t, their chances of ever collecting it plummets. Between the uninsured, underinsured, coverage gaps and lapsed policies, it’s no wonder medical care puts people in debt.
7. Saving too little or not at all. Not having a rainy day fund can put you in a financial pickle when it starts to pour. The simplest way to avoid unwanted debt is to have three to six months of living expenses saved. Between layoffs, illness, accidents or divorce, life happens, and having a cash cushion is important for avoiding immediate financial strain is necessary. No one has ever regretted “paying themselves first” or sitting on cash.
8. No money communication skills. Do you know where your spouse, children or significant other stand with their finances? Communicate financial obstacles such as debt and goals such as saving, investing, lifestyle and retirement. Many find their spouses have racked up thousands in credit card debt and they had no idea that the accounts even existed, which leads to No. 2 above.
9. Banking on a windfall. Don’t count your chickens – or cash flow – until they hatch. Just because you expect to receive a bonus, inheritance or to land a huge account doesn’t guarantee that you will.
10. Financial illiteracy. Cash, compounding, interest and investing … many people simply just do not understand how money works and grows. Don’t blame your teachers or parents for not being the best money coaches out there. Take responsibility for your life and money. You can educate yourself for free through sites such as Bankrate.com.