Updated: Jun 29
We live in a debt-driven society. Money is easy to borrow and easy to spend. We have credit card and retail card applications and approvals showing up in our mailbox and email on a daily basis. We have nearly unlimited options for online shopping where products will show up at our door almost overnight. Even the government tracks and promotes consumer spending every month. For some, it can seem nearly impossible to get out and stay out of debt.
Here are my “Top 3” ways that I have seen people get into debt, and how to avoid them:
1. Not paying attention to and/or not willing to delay what they think they need right away.
Years ago, I had a client who was living off a double income and had just purchased their first house. Soon thereafter, the wife delivered their first child. She decided to stay home with their baby, and they started living on a single income. With the new home came additional expenses such as window blinds, decorating, putting in a yard, installing a fence, and finishing a basement. Before they realized it, they had substantial credit card debt with only half the income that they once had. It’s so simple to get into debt but can take years to crawl out of it.
I’ve had other clients who have had legitimate household needs, such as a new washer and drier or new carpet, turn into a heavier burden than it should have been. With many stores offering 0% APR for a period of time for large purchases, it seems easy to be able to make these purchases when a need arises. Unfortunately, many people don’t understand that if the loans are not paid off during these introductory low interest rate periods, a high interest rate might be back charged from day one of the purchase. This leaves buyers unexpectedly stuck with a higher payment and additional interest due later on.
2. Not having an emergency fund
A while ago, I had a client couple who turned to a payday loan to make their $700 monthly rent payment. Unfortunately, at the 360% interest that they were being charged on this loan, only $10 of the $220 monthly payment was paying down principle. On top of that, they were only paying the minimum payment amount. When I showed them what they had already paid and that they would end up paying nearly three times the original balance in interest, they were motivated to clear it up once and for all. They picked up some overtime shifts at work, made extra payments, and came back to me a month later debt-free and ready to take the next step in their financial goals.
I’m also reminded of a friend in her early twenties working a part-time call center job and going to school. As with many young people starting out, she didn’t have any emergency savings and was mostly living paycheck to paycheck. One day, she got a flat tire driving to work and ultimately, the tire needed to be completely replaced. She couldn’t afford the $200 cost until her next paycheck two weeks away. Her lack of a vehicle made it difficult to get to work and put her job at risk. She even contemplated quitting school, all because of a flat tire. Fortunately, between riding her bike the long journey to work and negotiating for rides with kind coworkers, she was able to get paid and replace her tire. Although this circumstance was less than ideal, she learned a valuable lesson about the necessity to have even a small savings fund so that small problems don’t turn into much larger ones.
3. Lack of insurance, especially health and life insurance
Having adequate coverage, whether it is health, auto, home, or life insurance, is one of the best ways to avoid financial disaster. Insurance is an expense that we pay and truly hope we never have to use, but a single incident can bring financial troubles that can burden an individual or family for life. We are compelled to purchase home and auto insurance if we own and use these assets, but we aren’t always compelled to have appropriate health or life insurance. However, if a family is living paycheck to paycheck and doesn’t have emergency savings or a health savings account (HSA), even a broken arm or someone needing stitches can become a heavy financial load. Too often, we hear stories or see GoFundMe pages for those who have had unexpected and life-changing health diagnoses come into their family’s lives without suitable health insurance coverage. Similar situations can occur when loved ones suddenly pass away without appropriate life insurance coverage. I urge all my clients, and sometimes even plead with them, to be sure they have appropriate coverage to avoid these situations.
I have a good friend who lost his wife to a cancer diagnosis. She left behind five young children, one of whom was born with a severe mental handicap caused unknowingly by radiation treatments given to his wife while the child was in utero. As a sudden single father of five, he was immensely grateful to have had the large life insurance payout when his wife passed away. It made a nearly unbearable situation, physically and emotionally, not become a burden financially.
There are many ways to get into debt and even more ways to get stuck there. It affects our happiness, our relationships, and our ability to help others. Debt has a huge influence on our freedom of time and ability and can certainly damage our future retirement. As someone once said, “Those who understand interest earn it, while those who don’t, pay it.” Hopefully, we can help our clients get on the better side of that statement and stay there.