Have you ever wondered what causes people to fall into debt? Maybe you are one who is struggling to get out of the grasp that debt has on you. Or perhaps you are one of the few that has been lucky to get by without signing their life away. I am a firm believer that you should avoid debt at all costs, but it isn’t always that easy, is it? Yet, as most of us know from experience, going into debt often happens by surprise. What is it that causes people to go into debt? If we can understand the reasons or factors that lead someone to go into debt, it might be possible to avoid it.
Reasons People Go into Debt
Poor Financial Planning: While perhaps the most cliche, poor financial planning is a popular contributor to going into debt. If my wife and I fail to examine how much we are making, how much we are spending on necessary items like housing, transportation, food, etc., it will be easy for us to overspend our income. Not knowing where you stand financially can lead to false assumptions of financial security, when in reality you are spending away that hard-earned money.
Inability to Resist Impulse Purchases: Have you ever known someone that just can’t say no to a discounted item? As a result of overwhelming advertising, many people just make mistake after mistake that leads up to their financial demise. Do you walk through the grocery store and tell yourself that you have to have this or that? If so, it may be a sign that you have little control over your spending. If this is the case, I’d recommend staying away from popular electronic stores, like apple. My wife and I had to go there to replace our wireless keyboard and we had to put on our “blinders” to keep ourselves from walking out with a new laptop or accessories.
Trying to “Keep Up” with an Image: This cause of going into debt is often talked about on financial blogs as trying to keep up with the Joneses. The idea is that the people you come into contact have a nice car or house and you feel like you have to have the same things even if it means financial disaster. Before you deny that this affects you, think about whether you buy certain things just for the name.
While I know I am guilty of this from time to time, my brother and sister-in-law offer a better example of how this can lead to debt. They were struggling financially when the housing market crashed and their variable rate mortgage forced their monthly payments to shoot up. Yet, they also have a spending problem. Despite their financial instability, they continue to buy the latest gadgets. One day it a was a new iPhone, the next it was an I-Pad. In the most recent conversation, the next purchase is… you probably guessed it, a Macbook Pro. It’s this mentality that often leads people to finance a car that they can’t afford. What is unfortunate with American consumerism is that it is driven by the subliminal message that you can buy happiness with these items, whereas the reality is financial ruin.
Lack of Emergency Fund: It is easy to buy into the belief that you are financially secure and do not need any safety net. If you have a job with a nice salary and benefits, it is hard to think that something bad could happen. Buying into this assumption leads many to live without any financial reserves. Unfortunately when something bad happens like loss of job or a car breaking down, the only immediate answer is credit. Without a proper emergency fund, it is easy for even the smallest of expenses to push you into debt.
Emergency: While most of my reasons for people going into debt focus around irresponsibility, it would would be inaccurate to suggest that it always results from this. Truth be told, more people are forced into debt as a result of some major emergency. Whether it is a medical emergency that your insurance does not cover or some sort of natural disaster, bad things happen. In a matter of days, all sense of financial security can be wiped away and you can’t do a single thing to change it. Granted, there are things to do to try and protect yourself from these worst-case scenarios, but it’s not always full proof.
Investment: While there are lots of other reasons that people go into debt, another popular one is the belief that if it is an investment, it is okay. There is a rumor of there being such a thing as “good debt”. If you were to ask me, this only pushes people to accept that debt in general is okay. This idea of going into debt as an investment is often used to justify college debt because you are investing in your future. You may increase your future earnings and see a return on your “investment,” but there are ways to pay for college without going into debt. While there may be situations where going into debt has paid off for people, as a general rule, it puts you in a financial unstable position because you never know what is going to happen next.
What are other reasons that people go into debt?
This was written by Corey, a staff writer from 20’s Finances and Passive Income to Retire. He writes about his personal finances in order to inspire others to take charge of their lives and reach their financial goals.
My name is Derek, and I have my Bachelors Degree in Finance from Grand Valley State University. After graduation, I was not able to find a job that fully utilized my degree, but I still had a passion for Finance! So, I decided to focus my passion in the stock market. I studied Cash Flows, Balance Sheets, and Income Statements, put some money into the market and saw a good return on my investment. As satisfying as this was, I still felt that something was missing. I have a passion for Finance, but I also have a passion for people. If you have a willingness to learn, I will continue to teach.