Top 5 Reasons You're in Debt

 

 

What's On the List?

This list does not include hardships such as debt due to medical conditions, identity theft, or being taken by scam artists.


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5. You’ve been trying to keep up with the Joneses

For those of you who are not aware, the Joneses are in as much debt as you. While you’ve been trying to keep up with them, they’ve been trying to keep up with the Smiths. The Smiths however, are the only ones who have their financial affairs in order. Many Americans have decided that they want to have everything now. Call it what you will, a culture of consumption, a desire for immediate self-gratification, or a sense of entitlement. Whatever the case may be, if the neighbors have it or if it was featured on MTV Cribs, then part of the U.S. population feels the need to acquire it no matter the cost. According to the Federal Reserve, in 2007, consumer debt in the United States averaged about $21,000 per household. This number didn’t even include mortgage debt! Knowing this, the question has to be asked; Are you sure you want to keep up with the Joneses?

4. You live at or above your means

If you get $100, you spend $100. Sound familiar? Many of us believe that if we earn $25,000, $50,000 or $100,000 per year in income, our ‘means of living’ is equivalent. Contrary to popular belief, your means of living is less than what you earn. Subtract your tax debt, necessary living expenses and savings (consider it a necessity), and then see what you get. Does it make sense to have an upscale house or car but live paycheck to paycheck? Are all of those fancy clothes worth the daily stress that debt has caused you? Accept your lot in a life at any given time. It feels a lot better to scale back and have extra rather than have it all and have to balance it constantly so that you don’t tip over into financial disaster.

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3. You live on credit

Like the previous point, if you get $100, you spend $100. But, to top it off, you also spend $10 more on credit. There is nothing wrong with credit cards. But, make no mistake about it, they should not be thought of or used as if they are the equivalent of additional income. Credit cards are essentially a standing loan from a financial institution. If you’re in the habit of using credit cards and not paying off the balances within the specified grace period, you should consider not using them at all. Saving up your money and paying for purchases in full would be better for you.

To put things in perspective, if you have $5,000 in credit card debt that has an 18% APR, paying it off at a rate of $125 per month would take you 62 months and cost $2,693.11 in interest. That means that at the time your balance was paid in full, you will have paid 100% of the principal plus more than %50 in interests payments. To paint the picture another way, take all of the items that you purchased with the credit card such as movie tickets, clothes, computers, televisions, etc, and add 50% to the purchase price. That’s your cost for each item that you paid for over a 62 month period.

2. Fees and penalties – Debt by a thousand cuts

If you are in a difficult financial situation, the last thing that you want to do is throw money out of the window. Unfortunately, it’s at a time like this, when some people are doing good enough to just keep their heads above financial waters, that they allow fees to become a de facto monthly bill. Overdraft fees, non-sufficient funds (NSF) fees, over the limit fees, late fees, ATM fees and debit card transaction fees are just some of the ways that money gets zapped from your meager stash of cash. When you discover that account overdrafts and NSF fees can cost you something in the area of 30 to 35 dollars per event, you’ll discover that you could be adding literally hundreds of unnecessary dollars to your monthly debt.

So what should you do? If you’re constantly flirting with an empty bank account, call your bank and remove overdraft protection. Although they tell you that it’s a convenience that they offer you, it’s also one of the ways that they generate revenue in their business model (If it was really for your convenience, it would be free, right?). If you have automatic payments withdrawn from your bank account that continually cause you to overdraw your account, see if you can stop them and pay those bills manually. Don’t write checks that you know will bounce just to appease a creditor for the time being. You will ultimately have to pay the non-sufficient funds fee, and that’s also a good way to land your self in ChexSystems (bank account purgatory) if you make a habit of doing it.

Also call your credit card companies and ask them if they’ll hold-off on late and over the limit fees so that you can catch up to your monthly payments. Some credit card companies may have a payment program that you can utilize for a period of time. Insurance payments and other bills may charge late fees, do your best to keep up with these or call the companies and see if you can renegotiate your payment schedule.

Depending on your bank, they may or may not charge you a small fee for using your debit card as a debit card rather than selecting the credit card option at a point of sale (POS). Check to see what your bank’s policy is for your account. Those 25 and 50 cent fees are like a whole in your packet. Also withdraw money from ATMs in your bank’s network or at the cash register of your favorite store when you pay for your purchases. If your bank charges $3 if you use an ATM outside of the network and the bank that owns the ATM charges you $3 also, you will pay 6% in fees to withdraw $100, 10% for $60, 15% for $40 and 30% for $20. If your goal is to waste money, it would be faster just to shred it.

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Honorable mention: You don’t save any money

Any money that must be spent outside of your typical monthly expenditures puts you in dire straits. Any time you get a flat tire, the furnace needs repair or you receive emergency dental work, your world goes into a tail spin and you have to rob Peter to pay Paul. You start a cycle of not paying or shorting one creditor in order to pay another.

Nothing is perfect, especially life. Expect the unexpected expense. You say that you don’t have any money? Maybe you don’t. But, If you have bought any fast food, rented any movies or video games, or you’ve gone out for entertainment lately, you have extra money. You just have to decide what is more important. Just think, if you had an emergency fund of one or two thousand dollars, it would probably cover most of your typical emergencies. Pay your bank account first (your savings), then your debts along with living expenses, and then treat yourself with whatever is left over. If your means of living is hire than the average person (upper middle class and higher), increase the amount of your emergency fund. Maybe you need to save $5,000, $8,000 or more. Be honest with yourself and your situation.

1. Your parents never taught you how to manage your money

Your parents taught you about the birds and the bees and they taught you not to take candy from strangers. Although they instructed you in many things, they never educated you on finances. When you were a child and a grandparent or other family member gave you some money, your parents probably didn’t give you much if any instruction to go with it, like how to make your money last. So you proceeded to buy candy, toys or whatever your heart desired without an understanding of a budget.

Your parents probably didn’t teach about credit, what it is, the benefits of good credit and the consequences of bad credit. So you didn’t get a real understanding of it until you began do ruin it. And now that you are in debt, and your credit is ruined, struggling to find a way out of debt has caused you to become a subject matter expert. If you put forth a vigorous effort, you’ll be successful in reestablishing your credit worthiness. In the mean time, stop the cycle. Use your hard earned knowledge to teach your children about managing money. Give them a chance from the word go.

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