Sometimes it’s easy to pinpoint the exact moment your life cratered into debt. Other times, it seems that you just keep falling behind no matter what you do. But have you ever stopped to truly understand what’s going on behind the incessant bills?
Why people go into debt
Lack of understanding. Over the last 50 years, more and more financial decisions have landed on the backs of the American public. In 1970 very few people had a credit card, and retirement plans were either a pension or you depended on Social Security. Fast forward to today and many people are making decisions they haven’t been trained for. Some schools offer a cursory glance at financial topics, but too often it doesn’t drill down into how to understand a financial product enough to make an educated choice.
Easy credit. This has waxed and waned over the years. I’ve mentioned before that I signed up for my first credit card because I wanted a t-shirt. No verifiable income but suddenly I had credit. Those days are gone, but credit card offers still show up when you log in to your financial providers or even when you’re logging out of the credit bureaus. The cards are more enticing than my first card too; free miles…money back…it’s hard to ignore their offers.
Spending without thinking. Whether you’re a compulsive spender, someone who spends $100 every time they step into Target, or merely keeping up with what you see on social media, spending without thinking often causes trouble. There are so many questions to ask yourself: Do you need that item? Do you already have one? I’ve had a bad day – is that why I’m buying this?
Scarlett O’Hara syndrome. Okay, I don’t think there’s really a Scarlett syndrome, but believing “tomorrow is another day” and putting off hard financial decisions (or a growing debt balance) can easily backfire. Whether you’re embarrassed or simply don’t want to deal with it, you usually won’t get out of financial debt until you take charge.
Everyone’s doing it. Someone once told me that they were supporting the economy by spending. I wasn’t sure if they actually believed it, but it’s become the American way to spend now and deal with the repercussions later. Huge houses lead to spending to fill them up. And many of us don’t stop there – in addition to easy credit, the last 50 years has seen astronomical growth in self-storage units. We don’t stop spending even when we’ve filled up our huge houses.
Divorce. At one point, half of all marriages in the US ended in divorce. Suddenly a couple who may have been skating along on thin ice falls into the water because their total income is reduced while each person now must purchase or rent their own home.
Health. This along with divorce can quickly turn a positive balance sheet negative. While people like me say to have an emergency fund, sometimes even the emergency fund can’t cover the thousands in hospital bills due to a car accident. Often these types of emergencies cause long-term injuries that also force the person to stop working, either temporarily or permanently, further increasing money pressures.
Losing a job. Recently jobs have been easier to find, helping many people who were underemployed move into full employment. However, even with low unemployment, several companies recently announced restructurings and more could come as the inflationary effects linger.
Some questions to ask yourself
This really boils down to two categories of people with debt: those who didn’t have an emergency fund (or an inadequate fund) for unforeseen problems and those who just let their spending grow out of control.
Inadequate emergency fund. For those who had spending under control but were hit by divorce, medical costs, or the loss of a job – it’s time to build up your emergency fund. No, you can’t know everything, but only accumulating $2,500 with a salary of over $100,000 isn’t really an emergency fund. Look into how much you really need to save, then start putting money away now.
One thing to remember is you can also use investments in an emergency. If you have saved up three months of living expenses but still remain nervous, consider a Roth IRA. When you invest in a Roth, you’re investing after-tax money. You can withdraw your contributions at any point for any reason without penalty or tax consequences. This will of course curtail your IRA’s growth prospects, but it gives you an alternative to a huge balance in a low-interest savings account.
Out of control spending. With a medical emergency, it’s easy to point to the instance that caused you to go into debt. However, if you’re spending thoughtlessly, discovering where you went off the rails (and why) can help you get back on track. But this takes an honest look at your bills. Go through them one-by-one, looking at purchases and the amount you’ve been paying each month. Don’t beat yourself up over what happened; the past is past. Instead, rededicate yourself to managing your spending. Some questions that might help, include:
- What led to your largest debt balance?
- Are there purchases/stores/restaurants that show up repeatedly?
- Why did you choose to spend at these places or for these items?
- Did you even make the decision or just spend mindlessly?
- Were the items/events worth it?
- If you had the option to do it over, would you make the same choice?
Getting into debt is easy; finding a way out is much more difficult. Look for success stories – you aren’t the first person who has succumbed to the lure of easy money. Then take steps to not only pay off more of your debt (by increasing your income) but also to spend less and track what you spend. Consider tricks – whether it’s paying in cash or letting an item sit for 24 hours before you purchase. If you take control of your spending you can dig your way out of debt.
Photo by Tim Gouw