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With the current state of the economy, it’s easy to fall into debt and not know how to break free from the cycle. People get into debt for lots of different reasons, but it’s always because of one significant factor. When you spend more money than you make, debt is unavoidable. Of course, there are things that make this more complicated such as credit cards, short-term loans, and bank loans, but the issue is always the same. Below, you will find the top five reasons why people go into debt. This list can help you learn how to avoid debt causing financial decisions, so that you can protect your financial stability.
Unmonitored credit card usage
When you have a credit card, it can be very tempting to charge your purchases instead of taking the money directly out of your bank account. In fact, there is a huge economic benefit to doing this. The economic system rewards you for these types of financial decisions, by raising your credit score and making you more eligible for loans and other types of financial assistance. The downside is that if you do not monitor your credit card usage and responsibly handle this debt, you could very easily become late on your payments. This would make it difficult to get out of debt and you would undoubtedly fall behind on your bills and other financial obligations.
Poor money management skills
Managing money is not something that comes naturally to some people. If you do not manage your finances effectively, you are going to find yourself in debt. You can use tools like Mint.com to get control of your finances and understand where your money is being spent. This is a
critical step to the process and technology like this has made it much easier to control your spending habits.
Short-term loans or payday loans
One of the most popular types of financial assistance today is short-term loans, or otherwise called payday loans. The problem with these loans is that they require a very fast repayment, which is not possible for some of the borrowers. If you are unable to repay your loans on time, you will be forced to take out additional loans or burden the high interest rates of the initial loan for a prolonged period. This can take a significant toll on your finances.
Poor investment decisions
It takes money to make money and once you are able to make investments, you can build wealth at it much quicker rate than you normally can. However, if you make poor investment decisions, these business transactions can go sour and they can come back to hurt your financial stability. You should only invest in things that you know are profitable.
Over burdened by a mortgage
Today, mortgages are what lead many families into economic trouble. If you commit to a mortgage that is beyond your financial capacity, you’re going to find yourself struggling to pay your bills and staying afloat will become a real challenge. New homeowners need to recognize that they don’t need the biggest and the best home to feel good about themselves. Deciding to purchase a home that is well within your financial ability is a responsible decision to make.
March 5, 2013 at 9:55 am
I think the credit card usage gets people in trouble a lot. Although for me I can’t keep track of my cash whenever I have it on hand and I find it much easier to part ways with my cash than my credit card. I guess because it’s harder to track the cash and I know there’s a record of my credit card transactions. It’s a shame that there’s as much consumer debt because it just takes a little bit of planning and self control to avoid it.
March 5, 2013 at 10:52 am
JC hit the nail on the head. It is surprising, and disturbing, the overall level of consumer debt out there because of the complete lack of control. I understand their can be some extenuating circumstances that force people into make tough decisions, but a small level of self-control would alleviate most of these debt issues.
I never use cash, but have never once not known where my credit spending was, or carried a balance. I check it almost daily.
March 6, 2013 at 12:22 pm
I agree JC! I do the same, never use cash always credit cards that way I can track my spending. The advertisers and marketers today are top notch and have people wanting things they would have NEVER thought they needed. It’s absolutely crazy.
March 5, 2013 at 11:07 am
Good post Marvin! I agree with all of them, but I think they all point back to #2. Missing those basics of budgeting, watching spending and saving/investing get so many people in trouble. If that is missing you open yourself up to so many problem areas.
March 6, 2013 at 12:27 pm
You open yourself up to a lot of problems indeed John. If I could teach just one personal finance principle in our public schools this would be it!
March 5, 2013 at 11:29 am
Although all good points, I believe that you need to get to the root of overspending. If it is ignorance, get the skills. I believe people overspend because it makes them feel better initially and later it doesn’t matter. They are then stuck with the debt.
March 6, 2013 at 12:31 pm
Finding the reason why you are overspending will certainly help your budget problems in the long run. I also firmly believe that a person should buy anything they want IF they save up the money before purchasing. What is funny about savings though is once you save up enough money to purchase an item, chances are you don’t want it anymore. That’s what happened when I saved up to buy a big screen tv. I thought to myself “Why in the heck am I going to spend $1k on this tv?!”
March 5, 2013 at 7:36 pm
Can I add rampant consumerism and a desire to keep up with Joneses to this list? If you’re content with what you have, most should generally escape these issues. There will always be unfortunate cases of health issues etc that will send some people into debt, but consumerism is the biggest problem in my view. A happy frugal medium can benefit people in a number of ways
March 6, 2013 at 12:33 pm
Very true! People are buying a lot of “stuff” that they don’t NEED. If a family were to make a six month pledge to only purchase things they need I almost guarantee they will save more money than they ever dreamed.
March 5, 2013 at 9:56 pm
Payday loans not only require fast repayment but also charge horrendous interest and yet these are used by those who can afford it the least. The worst loan service on the market ever even as a quick emergency loan. Never ever do it!
March 6, 2013 at 12:36 pm
I know they are absolutely insane, I cringe every single time I see a commercial.
March 6, 2013 at 11:05 pm
Great points, poor money management skills are so true. Growing up I was never taught good money management or any money management for that matter. I think these skills are so vital, but so many adults dont have good skills, so how can they be an effective teacher? This phenomenon needs to change!!
March 8, 2013 at 3:45 pm
Thanks for sharing Jim, I agree this phenomenon needs to stop we need to start educating our younger generation.
March 7, 2013 at 4:00 pm
I have a lot of debt because of the 4th point. I’ve borrowed over $40,000 to invest in stocks, so far I’m pretty much breaking even but it’ll be interesting to see how things play out in the future. There’s also a lot of misinformation out there. Like insurance companies advertising for people to go into debt to buy their products.
March 8, 2013 at 3:48 pm
Sorry to hear you’re in debt. I always caution taking on debt while investing. I hope everything works out for you.
March 9, 2013 at 2:54 pm
Hi,
I think you hit most of the reasons. One that comes to mind is some people incur unexpected expenses such as an emergency or health. Personally my wife and I are more guilty of #4 and #5 on the list with a little splash of emergency in the mix as well. I do think that poor management would be the #1 culprit. Poor money management leads to the other four items in the list. I think could be fixed if parents and schools would take the time to educate the youth on money management/personal finance strategies.
March 11, 2013 at 10:47 am
I think you forgot a biggie–healtcare/medical bills. Even with due diligence and emergency funds, the cost of healthcare is too high for most to deal with a large, unexpected incident. Even with health insurance. 60-70% of all bankrupties in the US are due to medical bills.