If being in debt stresses you out, you’re not alone. Regardless of age, educational level, or income, most people face outstanding debt or financial instability at some point in their life. While there isn’t a singular cause that leads most people to being in debt, there are a handful of common contributors. Knowing what some of these common pitfalls are can help you to become mindful of your finances and minimize the factors that can add up to unsurmountable debt.
Poor Money Management
The quickest way people succumb to debt is by not controlling their spending habits. While everyone has a list of recurring expenses to account for—including mortgages, utilities, insurance, and more—miscellaneous spending on things such as entertainment and vacations can cause many to lose track of their budgeting and overspend.
The way spending works makes it very easy to waste money. Frequently using credit cards is a path often followed that leads to substantial debt due to the “buy now, pay later” mentality that card spending enables. Additionally, many people struggle to set aside enough of their money into a savings account. Since unexpected expenses and changes in income are viable for anyone, those who don’t manage their money wisely may not be properly prepared for those situations.
Hidden Interest Charges
While spending money with a card may add to debt, interest rates also have a noticeably negative effect. Each personal line of credit comes with an interest rate that inflates your balance over time if you don’t pay the debt in full each month. Though some cards have extremely high rates, others may feature lower rates that gradually increase over time without your understanding.
Before you sign up for any card, it is important that you read and understand all the rules of your interest rate so you aren’t surprised by large fees and charges down the road.
Lack of Financial Literacy
Many people end up in debt due to a lack of financial knowledge. Though not understanding interest rates is part of this problem, there are other pitfalls that affect many people. Learning how debt management works and what factors banks and lenders use when handling your accounts, for example, can help you to avoid debt.
Financial literacy isn’t covered in traditional schooling the same way languages and mathematics are, so it is up to you to educate yourself or consult with local experts to understand important topics. There are also many online classes you can attend to learn more about managing personal finances.
Shifts in Employment
Sudden changes in employment can be a big contributor to debt. Too often people expect their earnings to remain constant, and are then unable to cover basic expenses when they suddenly lose their job. However, underemployment can also add to debt, but for the opposite reason. People who suddenly have a new source of income are often eager to spend their paycheck without considering the consequences. In essence, many mortgage note buyers and investors grow their wealth over time by making long-term financial decisions.
Instead of spending without oversight, which can quickly lead to debt, it’s important to keep track of costs and earnings. Pad your bank account in preparation for big purchases or life changes. For instance, volunteering for overtime shifts or extra projects can help you to save extra money.
Another major cause of debt is also one that is impossible to prepare for: the unexpected emergency expense. Appliances that need to be replaced or sudden car maintenance, for example, can quickly consume any savings you may have. Worse yet are the surprise costs you might encounter after an accident or serious injury.
Medical bills are one of the biggest financial struggles that people incur, as treatment can result in bills totalling thousands of dollars. Depending on the illness or injury, you may also need to take time off work, which cuts off your stream of revenue. Only by saving money for the sole purpose of emergency expenses can you be well prepared for this devastating financial occurrence.
If you’re someone struggling with debt, contact a debt settlement company to help you with payments and fees. Consulting with a financial advisor can ease the burden and put you on your way to financial freedom, but preparing for financial emergencies in advance is always a good idea nevertheless. Only by actively taking responsibility over debt can you overcome it.