According to a survey completed by Pew Charitable Trusts, 80% of Americans have some debt. Not only is debt annoying, but it can prevent you from doing the things that you enjoy, it can also delay your retirement plans. So if nobody wants debt, why are 80% of Americans in it?
10 Reasons you are in Debt
You’re spending more than you make
This one might seem obvious, but tons of people don’t realize they are spending more money than they are making. With all of the automatic payments and the ease of swiping a debit/credit cards, it’s easy to lose track of the amount your spending versus the amount your making.
Luckily this is easy to fix. Spend one month tracking ALL of your spending. Everything from your groceries to your gas money. This includes all of those small “impulse” purchases. You can track our expenses by either keeping all of your receipts or by using a phone app. There are dozens of financial apps that you can download that will track your spending and then break it down into separate categories.
One of the most frequent reasons that people are in debt is because they are paying for things that they don’t need. Thousands of Americans are paying for goods and services that they don’t need, and it’s leaving them spending more than they are making.
Many consumers are cutting down on these unnecessary expenses to dig their way out of debt. Cutting cable television is one of the frequent payments being cut across America. With streaming services like Hulu and Netflix, the monthly $80-$150 cable bill has become too much.
You could also be eating your way into debt. In 2011, the average American was spending almost 5% of their income on eating out every month, which doesn’t sound like a lot, but could equal $2,000 or more every year. Cooking dinner and taking your lunch to work every day could give you an extra $100 – $200 every month that can help you take a big bite out of debt.
Buying things you can’t afford
Everyone always wants the newest and shiniest thing on the market, but this mentality will quickly drive you into a debt pit. Just because you HAVE the money doesn’t mean that you can afford to buy something. Unless it is a necessity for food or bills, be sure to think about if you can AFFORD to buy. Buying excess things that we don’t need is what has driven many households into crippling debt that takes years to recover from.
Understand your debt
One of the worst mistakes any person can make is not knowing how their money is coming in and where it is going. A good portion of all consumers continues to pay the minimum payments on debts that they don’t understand. But not understanding your debt and the interest rates with them will leave you in debt. Similar to a road trip, you need a plan or you’ll get lost or run out of gas, debt is the same way. Spend some time looking at all of your debts and create a map for which ones should be tackled first.
Not saving enough
This reason might seem counterproductive. How does not saving money put you into debt? Well, the answer is simple, life is unpredictable. You never know what is going to happen in your life, which means you never know what expenses you are going to face this month. Tomorrow you could get a bonus at work, or you could have to replace your air conditioning unit or pay for repairs on your car.
If you don’t have any savings built up, you could be left scrambling to pay for any unexpected expenses. Without the safety net of a savings account, you could be forced to take out a loan or use credit to pay for any emergency, which can drive you into debt (or further into debt).
Medical bills are one of the leading forces that drive consumers to bankruptcy. According to NerdWallet, medical bills cause around 2 million bankruptcies every year. Your health is important; you should never compromise it because of the rising costs of hospital stays or medications. Depending on your age and health, you could find health insurance coverage for only a few dollars every week.
While having health insurance can easily offset the expensive medical bills, having life insurance will make sure that if you were to pass away your loved ones do not end up in a financial bind. There are many different types of life insurance policies, but making sure you have some sort of policy in place for everyone who produces income in your family, keeps the entire family out of financial trouble.
Credit cards can either be a blessing or a curse (for most people they are the latter). Credit cards can provide excellent incentives and reward programs that can amount to free flights or cash back, and they are also a very good safety net if you face any unexpected emergencies that you can’t afford. But credit cards can also end up being a thorn in your financial side.
The average household has around $15,000 in credit care debt alone. Most consumers will have several credit cards that they use every month, some of them have painfully high-interest rates. Credit card debt is one of the most common types of debt. The best way to climb your way out of debt is to pay off these credit card debts as soon as possible. Almost all of them carry high-interest rates leaving you paying more money than you should.
Aside from credit card debt, mortgage loans are the most common type of debt in America. Mortgages are causing older Americans to enter into retirement with thousands of dollars in debt. The average mortgage debt is up to $79,000, over an 80% increase from previous years. Mortgages can create serious financial challenges in every stage of life.
Depending on where you are in your life, consider downsizing your home that would translate into a lower monthly payment. Moving to a much smaller house could save you around $5,000 or $6,000 every year.
The price of college is at its highest point in history. The average cost of a four-year degree at a public university is up to over $24,000 while the average private college degree has skyrocketed to over $47,000.
While college attendance has dropped slightly among particular demographics, there are still thousands of recent graduates (and not-so-recent graduates) that are stuck under piles of student loan debt. These loans are following college graduates into their professional lives, making it difficult to get out of debt.
One way to ease the pain of those massive student loans is to apply for income-based repayment plans. Depending on the loan, you monthly payments could be reduced drastically, giving you a better chance to get out of debt instead of being stuck with thousands of dollars of debt from that college diploma.
Keeping up with the Jones’
The grass is always greener on the other side, and the other side is normally our neighbors yard. It’s easy to want the nice things that other people have. But trying to have the same things that other people have could lead you (and the Jones’) into debt. Having the newest and shiniest toy, but they aren’t worth the years of debt they could cause.