Debt has a way of sneaking up on us. It seems as though one moment we are free and clear and the next we have a mountain of trouble in the form of money owed. Knowing why we can get into debt is the first step to preventing it from getting worse or from happening at all. Here are some common reasons why we get into debt and how we can minimize out risk of debt in the future.
Unexpected Expenses or Loss of Income
An unexpected expense or a loss of income can plunge even the most affluent families into debt if they are not prepared. Having to suddenly come up with a large sum of money or finding yourself out of a job can be devastating. Statistically, chances are pretty good that something like this will happen to your family at some point in your lives, so the trick is to be prepared for it.
Spend months or even years living below your means so you can sock away the extra cash into an emergency fund to cover you in the event of the unexpected. Conventional wisdom says that every family should have three to six months worth of expenses covered in the event of an emergency, but with the economy an job growth as slow as it is right now, it might be prudent to put by an even larger amount.
We Succumb to Marketing and Rationalization
It is hard to resist marketing when it constantly tells us that we need the latest and the greatest in order to be happy, and it doesn’t stop with us. Our children are also subjected to a barrage of messages on consumerism. In our society, things are often linked to status, which makes resisting the marketing so much harder.
When we are faced with a buying decision, there is often a lot of unconscious rationalization we practice. Why buy the regular car when the extra version with all of the amenities is only $200 more a month? Why live with the same old furniture when we can pay off the new in an installment plan.
Before making that next purchase decide if it is worth giving up your potential wealth in the future.
We Don’t Run Our Own Numbers
Our current societal mindset is to borrow as much as we are allowed to borrow, whether this is through a mortgage loan, a car payment loan or through the use of credit cards. We haven’t learned to run our own numbers, that is the amount that we can comfortably pay, and instead rely on what others tell us we can afford.
This is a dangerous practice, since the people telling us what we can afford are the same people who stand to make a profit. The more we borrow, the more income they bring home. Yet, we trust this like a deer in the headlights.
Figure out exactly how much you can afford and if the payment is really necessary, before you agree.
We Don’t Live Below Our Means
Always living on the edge of what we can afford means that we can never build wealth. We are constantly sending out what we bring in. This doesn’t matter whether we make $20,000 or $200,000. When we gain income we tend to also gain expense: a bigger home, a better car, etc.
A better bet is to take 10 percent of your income and put it into savings or an investment, then live on the rest.