3 Primary Causes For Debt

For many people, the word “debt” sends a shiver down their spine. They either have unmanageable debt or have escaped a frightening situation where this was once true for them.

It’s not a word that is used lightly in a conversation. The reason debt triggers such an emotional charge is because we link our well-being and survival to money, and when we owe more money than we are bringing in, then we feel a sense of dread.

Options for Debt Relief

If you have debt, you have 3 main options:

  1. Self-help. Help yourself through learning money management techniques like budgeting. You can take classes in financial literacy to get better at managing your money.
  2. Ask for help. Work with a debt relief services, like debt settlement or debt consolidation. Only work with a reputable firm, so do your research before signing up for any program.
  3. File for bankruptcy. In an interview on the Wellness Hour Consumer Report, host Randy Alvarez interviewed Michael Doan from the Doan Law Firm about bankruptcy filings as a way to cope with unmanageable debt. Mr. Doan said that many people wait too long to file for bankruptcy, filing after they deplete assets that could have been protected in a bankruptcy filing.

Reasons for Debt

There are three primary reasons why people go into debt:

  • First, it’s because of poor money management.
  • Second, it’s because of inaccurate thinking about money.
  • Third, it’s because of unexpected financial problems.

Let’s take a closer look at these 3 categories of debt.

Poor Money Management

  1. Financial illiteracy.

Money can be said to be a game with rules. If you don’t know the rules, you are going to be on the losing end of the game. Managing money is not as simple as earning a living and paying bills.

Schools don’t teach skills like how to balance a paycheck, and few parents sit down with their kids and explain the value of saving and investments and how to avoid clever sales tactics. It’s important to get an education about how money works.

  1. Financial neglect.

Education about how to earn money, how to spend it, how to save it, and how to invest it, isn’t always enough.

You may, for example, know how to create a budget, but still not do it. Yet without this simple tool, you might be spending money unnecessarily on things you don’t need while not having enough money for some necessary expenses.

Usually, the problem is not a lack of skills but a psychological issue related to not wanting to take financial responsibility.

  1. No savings.

Many people don’t like to save because of inflation. Since the purchasing power of their money dwindles over time, they are losing money by parking it into a savings account. Although they earn interest from their savings account, it is less than the rising cost of living.

However, in an emergency, like the loss of a contract if they are self-employed or the loss of a job if they work for someone can create a crisis. With 3 to 6 months savings, they could manage the sudden loss of income and find new income opportunities.

  1. Underemployment.

After a job loss, a person may have to settle for a job where they are underemployed.

However, this situation may continue for a longer time before they anticipated. In the meanwhile, they may still be paying the same expenses that they were able to handle when they had better paying employment.

Inaccurate Thinking

Sometimes debt occurs because of inaccurate thinking about a life situation.

  1. Inaccurate thinking after a financial loss.

Sometimes after an unexpected financial downturn — like reduced hours offered by an employer or a decrease in sales — people don’t adjust their expenses.

They spend the same amount as they normally did and not make any adjustments to their old spending habits. As a result, they begin to rely more heavily on their credit cards to manage the discrepancy between income and expenses.

  1. Relying on an expected windfall.

Sometimes people don’t manage their money well because they are expecting an inheritance or some other type of future windfall to compensate for their current overspending.

When these don’t materialize as expected—for instance, their relative may have only pretended to be wealthy—they find themselves short of the money they need to pay back all their expenses.

  1. Addictions.

Sometimes the desire to consume is greater than the means to do so. Besides the high cost of sustaining a drug addiction, there are also other types of addiction like gambling. A person who has an addiction finds themselves unable to stop despite the obvious negative consequences of their behavior.

Unexpected Life Circumstances

Sometimes people can be doing everything right when it comes to managing their money, but experience circumstances that completely drain their assets.

  1. Divorce.

This can be devastating for one or both parties. Besides the psychological pain, there are numerous expenses and losses associated with getting a divorce.

  1. Medical expenses.

Just a few days in the hospital can put you in debt for tens of thousands of dollars if you don’t have coverage.

  1. Death in the family.

The death of a loved one can create a lot of sudden expenses. Money has to be managed. It doesn’t matter how much or little you have, it has to be managed to avoid debt.

The bottom line is that money has to be managed:  It doesn’t matter how much or little you have, it has to be managed to avoid debt.

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