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Falling into financial debt is very common for people of all ages; however, at the same time, everyone is also caught up in a constant struggle to get out of it. Keeping yourself from falling into debt isn’t impossible if you understand the reasons why you fall into them in the first place.
We brought in the experts to explain the most common reasons why people get into debt, so you can plan and avoid them;
Living over our means is one of the most common ways for people to get into debt. This is something I've done in the past as well. On weekends, I used to blow a lot of money drinking at expensive pubs and dining at expensive restaurants. And I frequently run out of money a week before my next paycheck arrives. When that happens, I always reach for my credit card. I used to use my credit cards to book flight tickets and hotel rooms so that I could party on some islands with my buddies for a weekend. Living beyond my means never concerned me because I was surrounded by folks who did the same thing. It appeared to be the norm at the time.
What to Do: If you're aware that you're living over your means, the first step is to keep track of your costs and figure out what your biggest expense is. Break it down into tiny chunks and cross off the items on your list that aren't necessary or those you can live without.
Begin developing a realistic budget that you can live with using this information. Surrounding oneself with folks who live within their means is another approach that could assist. Try to keep your distance from folks who live expensive lives despite the fact that they are living paycheck to paycheck.
Gavin Johnson Managing Director at Evking
You've probably seen the credit card offers for a free round trip ticket or 50,000 points if you spend $3,000 in the first three months or so. Doesn't it sound like a decent deal? It is for the benefit of credit card corporations. Most people spend their money thinking they'll pay it off soon, whereas in reality, soon is usually a long time away.
According to a national poll conducted in 2009, 46% of persons aged 18 to 29 had carried a balance in the previous 12 months, and 29% had paid only the minimum payment at some time during the year. That's why creditors make these deals: they know most consumers don't have the discipline (or the money) to pay off their bill in full once they've racked up the fees. That balance remains unchanged, and those benefits end up costing you a lot of money.
People get into debt by spending more than they earn. Although it appears to be straightforward, most of us do not take the time to properly track our income and expenses. No, sitting down with an Excel sheet every week doesn't sound exciting, but having a budget and sticking to it is critical to understanding how much money you have to spend and not going over your spending limitations.
For each of us, the incentives to spend and the realities of our finances are a bit different. However, after you've identified the reasons you get into difficulty, you may take preventative measures to ensure you don't repeat the same mistakes (or never get into debt in the first place).
Keenan Beavis, Founder Longhouse Media
People also go into debt due to their vices. No matter how much money you make, uncontrollable vices will always lead to debt. Drugs, alcohol, and gambling are popular vices that lead to debt. Gambling has caused some to lose everything. Some others pawned jewelry, automobiles, and even houses to gamble. Some go into massive debt merely to gamble in casinos. It can start with a harmless night out with pals.
Casinos are known for being entertainment hubs as well as gambling hubs—live music, restaurants, shops, cinemas, hotels, etc. You could be convinced to attempt one game once you arrive. One game leads to another, and then it's downhill from there. Same with drugs and booze. One sip, one puff, and the rest is history.
What to do: If you know you are easily swayed or addicted to something, don't try it. If your pals are going to a casino, don't go. Find other ways to amuse yourself. The options are unlimited. You can use that money to travel to areas you've always wanted to see. Or to attempt new things you've always wanted to try.
Gerrid Smith, CEO & Founder of Property Tax Loan Pros
Debt cannot be avoided in today's society, and for the most part, difficulty dealing with debt comes from hardship such as losing a job or from unforeseeable circumstances. As a result of not having a stable emergency fund for these instances, large financial difficulties cannot be dealt with, so debt products like personal loans, short-term loans, or payday loans must be entered into, which is the start of a slippery slope.
However, debt can also become a problem due to a lack of financial literacy, which limits understanding when using complex financial products like credit cards, mortgages, or personal loans. Because of this limited understanding and perhaps disorganization, people miss payments.
Additionally, in the absence of at least a low-level budget that tracks spending in order to prevent one from spending more than they earn - this is the most dangerous financial habit.
Scott Nelson, CEO of MoneyNerd Limited, provides advice for those who are struggling to pay debts and are looking to improve their financial education.
Many people take gambling as a form of entertainment, but there are those addicted to hoping that they will win big. As a result, they use all means to find money to stake. In the end, they lose and will search for more money. Loans are an easy way to find the money to stake, and people end up borrowing to try and win back what they already lost.
Once your income reduces, you have to adjust your expenditure quickly. However, many people take a long time to realize that they need to adjust, and their expenses exceed their income. As a result, they fall into debt to finance their usual lifestyle. It is always good to realize things have changed and start budgeting and eliminating unnecessary expenses.
Harriet Chan, the Co-Founder and Marketing Director at CocoFinder.
From my experiences in the consumer debt industry, people fall into debt due to one of three reasons: job loss, medical emergency, or unexpected expenses.
When someone experiences a job loss, with little to no income coming in, it can become impossible to keep up with their bills. As a result, many people resort to the use of personal loans and/or credit cards to stay afloat.
When a medical emergency occurs, some who receive medical care don't realize how expensive it can become if their health insurance does not cover the entirety of the expense. This forces people to use credit cards to pay their medical bills, which can cause a person to fall into the vicious credit card interest trap.
Unexpected expenses arise more often than we like, but many people aren't able to cover the cost with their savings. Whether it's purchasing a new washing machine, or repairing your hot water heater, if you don't have substantial cash reserves, you may have to borrow money to afford such expenses. To avoid this, do your best to maintain a nice rainy day savings fund should expenses such as these come up.
James Lambridis, the Founder and CEO of DebtMD, a fintech platform that connects people with the professional help they need to become debt-free.
People go into debt for several reasons. Sometimes it’s just a poor turn of events that couldn’t be prevented, and sometimes it is about poor financial planning. Many people don’t have safety nets and budgets for emergencies that will help them get out of unpredicted expenses easily, so they need to borrow from banks and go into debt.
Even if you plan your budget but fail to save some money for the emergency fund, you might end up in debt you’ll be struggling to repay. Sometimes, people go into debt because they suddenly become ill and need to cover the expenses of medical treatments. Sometimes it’s just about losing a job and surviving the period without a stable income. Sometimes going into debt is preventable, and sometimes it isn’t.
However, you can boost your chances of staying on the safe side and out of debt is to putting some money aside every month for unexpected spending and medical bills that could put you in debt.
Stefan Ateljevic, Founder of CryptoBlokes
One of the main reasons that people fall into debt is that they don’t have sufficient savings to cover emergencies. Having an emergency fund is essential if you don’t want to rely on credit cards or loans every time something happens unexpectedly, such as a tire bursting or a dental bill. Getting into the habit of relying on credit can be dangerous as it’s a very difficult cycle to break once you start.
You should aim to have 2-3 months’ worth of income as an emergency fund as this would give you a backup if you suddenly lost your job or had a drop in income. This might sound daunting but just start by saving little and often. You will be surprised at how fast it builds up and, once you see your savings start to grow, it will feel very rewarding and give you more of an incentive to keep going. Holly Andrews, Managing Director at KIS Finance