No one wakes up one day and decides to go on a spending spree, ready to max out all their credit cards at once. While that might make a good reality show, it’s not the reason Americans owe $12.12 trillion in debt.
We can argue about “good debt” versus “bad debt”. But the truth is most Americans owe money month after month. And it’s dragging down our ability to build wealth.
Our own family owes a variety of debt. We’ve got credit card bills, car payments, and student loans. It wasn’t done lightly, but from a sense of necessity (real or not).
So why are so many people in debt? It’s because they react rather than prepare. They know they should be saving for a rainy day, but the sky sure looks clear right now! There’s no sense of urgency without an emergency.
Just as we study history to avoid repeat failures, we need to examine why people go into debt. How do we avoid debt? By preparing for the types of situations that land people in the hole.
This post has been written by our talented new staff writer, Jamie Jeffers. Enjoy!
Here are some of the most common reasons people go into debt and how to avoid them.
Some of us have better health than others, but that doesn’t mean you should take your health for granted. Healthcare these days is sticky (to put it nicely), and insurance is becoming even more expensive.
If you’re surprised by a sudden medical emergency, the last thing you want to worry about is how you’ll pay for it. The best time to plan for this is while you’re healthy.
We’ll talk more about how to save on medical bills in an upcoming post. For now, be careful about putting your medical debt on a credit card. If you’re offered a discount on a lump sum payment, consider your card’s interest rates and how long it will take to pay off. Are you likely to pay more than the minimum on that card? If not, you’re better off making payments to the hospital or doctor.
An emergency fund is a must for everyone. The car will break down when you least expect it. A tree might fall on the house. You might face unemployment. Any number of unexpected expenses could occur.
Save as much as you can in an emergency fund. The general rule of thumb is 3-6 months expenses. If that sounds monumental, at least begin with $1,000. Add to it as you are able.
Emergencies will sideline you at some point. It’s far too easy to reach for your credit card when you can’t think straight. Have that money at the ready to cover expenses, or to pay off that credit card bill before it can gather interest.
It’s a gotta-have-it-now world we live in these days. Want to watch a movie? You can pay to stream just about any movie instantly. Why wait for 2-day shipping when someone can drive a package to you right away? Should you really have to work your entire life before you can afford a swanky car?
There was a time when only the older generation had nicer things. They’d work for years and save pennies until they could afford the things they’d only dreamed of having. Younger people understood that they couldn’t always have what their elders had.
I’m not suggesting that you wait until you’re gray to drive the car you dream of owning. But delaying gratification until you’ve saved enough to pay cash is a way of life we can still have. It’s harder and less comfortable, but it’s doable.
Open a special account to fund your wildest dreams. Or go old fashioned and grab a piggy bank or a jar and start saving. Take that money you would have been sending in as payments and begin paying yourself instead.
We rob ourselves of the fun of anticipation when we grab everything we want in our fists. Even worse, we rob ourselves of interest rates working for us rather than making the bank rich.
Keeping Up with the Joneses
Consider why you want that must have item so much. Does it bring real value to your life? Or are you just playing keep up with the Joneses?
Close neighborhoods and subdivisions used to be the main breeding ground for Jones-like behavior. Nowadays, we don’t even have to look outside to feel the pressure. Social media has taken over.
Whether it’s the perfect mom on Facebook or the ultimate man cave showcased on television, we all feel the pressure to have more, do more, be more.
Those things look amazing, but are they worth it?
If you can afford those items and they’re worth your wealth, go for it. But if you find yourself financing fancy things so you can post about it on Instagram, you need to take a step back.
Stretching Your Budget to the Max
Is there always too much month for your money? If you use credit cards to stretch your grocery budget, that’s a tough spiral to break.
This is not a way to live life.
Take a hard look at your expenses and income. One or both of them need to change if you can’t escape paycheck to paycheck living.
Question every purchase you make and every bill you pay. How can you save money on this? Is it necessary? Drop all non-essential purchases until you can put your budget together. Remember that food is necessary, but potato chips are not.
Now look at your income column. How can you raise this? Get a part time job, ask for a raise, look into side hustles. Do what it takes to build an emergency fund. Prepare yourself to escape paycheck to paycheck living. Don’t bother trying to pay down debt until you’ve balanced your budget.
Prepare now so you can escape these debt-inducing problems.
You won’t get to wake up one day and decide to max out your credit cards. Instead, you’ll wake up knowing that this is the day you can finally buy that long anticipated treat!