The Top Causes of Debt: What You Can Do About It

The Top Causes of Debt: What You Can Do About It

People go into debt for several reasons, but poor money management is the source of many financial woes. Here's how you can stop and reverse the cycle of debt.

Almost everyone knows that debt is something to be avoided, but do you know what the top causes of debt are? Some of the top causes are abrupt and unexpected, like medical expenses or divorce. However, most of the causes are directly tied to a misunderstanding of one's current financial situation. Included are things like having little or no savings, having more expenses than income, and having poor money management skills. The good news is that debt from these causes is extremely preventable and manageable with a little foresight and planning.

Since poor money management is related to several of the top causes of debt (which mainly boils down to spending more than you earn), it is absolutely essential to have a monthly budget that includes exactly how much you have coming in and how much you have going out. You can look at previous checking account statements to review your spending habits to see precisely how much that $35 dinner several times a month costs you. You may be spending hundreds of dollars more on things like dining out than you previously thought. The process of writing down how much money you spend also has an added bonus: you spend less on frivolous things if you know you’ll be writing it down and keeping a record of it. This is the same rational behind many diets that have you logging your daily food. Instead of a food diet, this is your financial diet.

If you have a recently-reduced income (due to work hours being cut or having a spouse laid off), it is imperative that you reduce your expenses accordingly to compensate for the deficit. It might be sufficient to take mild actions, such as cutting down the number of lattes you order during the week. If your debt ratio is extremely high, it may be necessary to implement more drastic measures, such as moving to a smaller/cheaper house or giving up one of the family cars. No matter which situation you fall under, the quicker you take action to reduce your expenses, the better off you’ll be.

People often incur debt from having insufficient savings for unexpected expenses that come up. To remedy and prevent this problem, you first need to establish and maintain a monthly budget where you spend less than you earn. Then, you should pay yourself a set amount every month, just like a regular bill. The old rule of thumb is that it’s a good idea to have three to six months of living expenses in the bank. In a truly bad economy, where people are unemployed for extended periods of time, three to six months may not be enough. However, it’s still better than nothing at all. It will also still cover that transmission repair you need to have done so you can continue to use your car to get to work.

Perhaps one of the best ways you can avoid debt is by becoming—and staying—financially literate. Knowledge is power, and the financial arena has proved that adage time and time again. For the best information on financial articles and resources, click here.

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