Top 10 causes of debt
Hundreds of readers have written to me asking for
advice on dealing with debt and how to avoid debt in the future.
Between Bankrate readers and my clients at Consumer Credit Counseling
Service of Southern New England, I have a unique source of data.
Yes, it is unscientific, but it is reality as experienced by a growing
number of Americans.
So here goes: Your top 10 causes of debt!
1. Reduced income/same expenses.
Too often we delay bringing expenses in line with a reduction in
income for a host of good reasons and let debt fill the gap. The
sooner you adjust to your new reality, whether it be temporary or
permanent, the better off you'll be.
2. Divorce. More than
half of us do it, some more than once. I can think of few things
more expensive and likely to put you in debt. For those of you who
have never done it and would like to get some idea of the impact,
sell all your assets and get the money in $50 bills. Go to a hotel
on a busy street, and you and your spouse open two windows and see
who can throw the most money out the fastest. It can be breathtaking.
3. Poor money management.
A monthly spending plan is essential. Without one you have no idea
where your money is going. You may be spending hundreds of dollars
unnecessarily each month and end up having to charge purchases on
which you should have spent that money. Planning is no more difficult
than writing down your expenses and income and reconciling the two.
You will be surprised at how powerful you'll feel when you are making
thoughtful decisions about where and when to spend your money.
4. Underemployment. A
close cousin to No. 1, people who experience under employment
may continue to think of it as only temporary or if they are coming
off unemployment feel a false sense of relief. Yes, you deserve
a break, but this is not the time. Get those expenses in line with
your current income. Down the road if you increase your income due
to more hours, a second job, or a better job, then is the time to
start adding in some of the previous spending before you became
5. Gambling. Call it
America's new entertainment or (considering the boom in tribal casinos) the Indian's revenge. Either way there
is a guaranteed exchange of money from you to "the house."
It can be addictive, hard to stop and loans are freely available.
Gambling establishments may be the only place you can mortgage your
house while intoxicated and have it be legal. I'm sorry, I forgot
-- this is entertainment!
6. Medical expenses.
Gaps in coverage, lapsed policies and increasingly costly alternatives
make this a popular category. Just about every doctor I know now
takes credit cards. If you think it's for convenience, think again.
The medical industry wants to get paid at the time service is rendered.
They know that if they don't, the chances of their getting paid
drops. This means more debt for you, less for them. To be fair,
they are not in the lending business, but this only masks a bigger
7. Saving too little or not
at all. The simplest way to avoid unwanted debt is to prepare
for unexpected expenditures by saving three to six months of living
expenses. With a savings cushion in place, a job layoff, illness
or divorce will not cause immediate financial strain and increase
debt. You always hear, "Pay yourself first." Do it and
it will grow and be there when you need it. No one has ever regretted
having a savings cushion.
8. No money communication
skills. It is important to communicate with your spouse or
significant other and your children about finances. Keep the lines
of communication open and discuss financial goals and spending styles.
If you are married to a spender and you are a saver, you will want
to map out a strategy for you both to get what you want. Know what
credit accounts you each have and promise each other to be honest
about what each other spends. Many people find out that their spouses
have racked up thousands of dollars in credit card debt and they
had no idea that the accounts even existed. This often leads to
number 2 above.
9. Banking on a windfall.
Spending tomorrow's money today is very tempting. Especially
if you believe that tomorrow will come no matter what. A planned
job bonus may not be a sure thing. The inheritance that you believe
will come your way may not. The lesson is don't spend the money
until the check clears.
10. Financial illiteracy.
Many people don't understand how money works and grows, how to save
and invest for a rainy day, or even why they should balance their
checkbook. The schools don't teach it, your parents may not have
sat you down and explained it. It doesn't matter. You are responsible
for your life and your money anyway. Financial mistakes are increasingly
expensive and complicated to resolve. Get educated and get in control.