An important part of financial freedom is staying out of debt, and most people try their possible best to prevent debt or even pay off all their debt. But sometimes, with all the effort they put in, debt still accumulates and you are overwhelmed.
So what is the solution to staying out of debt completely? We first need to find out what these mistakes are, then we can offer solutions to them.
- What are the Mistake that Keeps People in Debt?
- What Obstacles Prevent Getting Lower Income from Getting out of Debt?
- What are Some Causes of Excessive Debt?
- What are Some Warning Signs of Debt Problems?
- What Should you do When you have too much Debt?
What are the Mistake that Keeps People in Debt?
According to Beverly Harzog, author of “The Debt Escape Plan: How to Free Yourself From Credit Card Balances, Boost Your Credit Score, and Live Debt-Free,” if you’re in debt, there’s a good chance you’re making some mistakes that are helping you stay there or sinking you even lower.
Read Also: How to Get Out of Debt Working a Minimum Wage Job
Harzog would know. She used to be in debt to the tune of $20,000, and admits to having made many “gateway mistakes.”
“Once you get comfortable with these mistakes, you’re just a few steps away from the bigger mistakes that take you all the way down the rabbit hole,” the author writes.
Here they are:
1. You’re in denial
Harzog refers to this mistake as “head-in-sand syndrome.” When the author found herself in a mountain of the consumer? debt and unable to pay her monthly bills such as rent and electricity, she simply stopped checking her mailbox and therefore stopped receiving bills. And then one day she ran into the mailman who brought her back to reality.
“Unfortunately during my break from reality, everything had deteriorated to the point of ugliness,” Harzog writes. “Some of my accounts had gone to collection agencies. My electricity was about to be turned off. Serious stuff was happening because I refused to live in reality.”
2. You think of yourself as a victim
Harzog says that the two most common complaints she hears from debtors who think of themselves as victims are, “the credit card companies tricked me,” and, “I experienced a crisis.”
When it comes to being tricked, the author writes, “Sure, we all indulge in impulse buys now and then, but you can’t blame $30,000 of credit card debt on commercials or complicated fine print.” And while Harzog feels for those who experienced a crisis out of their control such as a medical emergency, she points out the harsh reality is, “It’s still your debt and you have to pay it off.”
If you continue to identify as the victim, she continues, “You’ll be too angry to stay focused, because getting out of debt isn’t for the faint of heart; it’s hard work, and you have to be all in.”
3. You don’t identify the real issue that put you in debt
According to Harzog, it’s all too common that people fail to acknowledge the specific problem they have that led them into debt. “I’m talking about narrowing down your problem to the exact source,” she writes. “So saying ‘I spend too much time at the mall’ isn’t specific enough. If you don’t isolate the specific source of your problem, you can’t make the necessary adjustments.”
4. Your credit card debt isn’t your priority
Harzog makes the distinction between good and bad debt: good debt comes from making an investment (think mortgages and student loans); bad debt comes “borrowing money for something that won’t appreciate in value.”
According to the author, credit card debt falls under the bad debt category, because when you buy something with credit — let’s say a laptop, for example — its value will depreciate as you use it, but your credit card company will be able to charge you interest until you pay off the laptop completely. So the longer you wait to pay off credit card debt, the more you’ll end up paying in the long run.
5. You’re only paying the minimum on your credit card balances
Harzog poses a hypothetical situation where a person is $10,000 in debt, all on one credit card, with an APR of 15%. The minimum payment is interest plus 1% of the balance. “In this example, your minimum payment for the first month is $225,” she writes.
“If you only make the minimum required payment every month, it will take you 335 months — that’s 27.9 years! — to pay off your debt. During these 27.9 years, you will have paid $11,979.29 in interest.”
If you have the money to pay more, Harzog’s calculations show that taking the most aggressive approach possible to paying down your debt is the smartest — and cheapest — way to go.
6. You’re concerned with keeping up with Joneses
Harzog brings up the fact that keeping up with the Joneses has risen to a whole new level today thanks to social media. “Social media, especially Facebook, has created a sort of virtual competition among users,” she writes.
Outside of Facebook, “Your office can be a breeding ground for competitive behavior, and this extends to material possessions that have little to do with where you work,” Harzog continues.
The author points out that if keeping up with the Joneses is keeping you in debt, it’s really not worth the stress you’ll feel when your bills arrive and you have to pay them. Plus, chances are, you don’t truly know what financial situation the Joneses are actually in.
7. You think personal finance is boring, and you can’t be bothered with it
Harzog remembers that when she was in debt, she was anything but bored by personal finance. “I devoured books and magazines on this topic.” She continues, “These days it’s so easy just to hop online and pick a personal finance website that has tons of information. You can even pick sites that cater to your specific needs.”
If you need a place to start, check out some of these websites that will help boost your financial knowledge.
8. You haven’t considered asking for help
Harzog suggests two sources you can consider using if you’re “so deep in the weeds of debt that you can’t see any path that will help you escape”: hardship departments at credit card companies and credit counseling.
According to the author, hardship departments are there for those whose debt came from a crisis such as unemployment or a serious illness. Programs through this department offer anything from a lower interest rate to lower minimum payments and waived fees.
Harzog writes that credit counseling can be as simple as a phone counseling session where you can talk to and receive help from a professional.
9. You haven’t made financial goals for yourself
According to Harzog, it’s easier to stick to your budget and stay on track with your finances when you have something concrete and defined that you’re working towards. “There’s something about keeping your eye on the financial horizon that changes the way you handle your money,” she writes. “It gives you a goal to work toward.”
Your goal can be anything from becoming a homeowner to launching your own business. Just take the time to map out some specific goals that will help motivate you to get out of debt.
What Obstacles Prevent Getting Lower Income from Getting out of Debt?
Everybody knows that too much debt is bad; the financial universe is filled with blogs, experts, and gurus who tell us as much and even how to get out. So why is it that people cannot get out of debt? Is it because debtors behave badly, that they fail to adequately confront their credit problems? Or are they just plain lazy?
1. Lack of sufficient income to do so
A lot of people are making less money than they were just a few years ago. They were making more money when they incurred their debt, but now the lower income level has them in a trap where they have barely enough money to pay living expenses, let alone pay off debt.
2. A rate of inflation that’s substantially higher than what is publicly reported
Over time, expenses are growing faster than income, especially since raises are usually tied to the understated inflation rate (CPI). Does anyone really believe inflation is running at the 1-2% rate that’s claimed by the CPI? A 2% raise (again based on the CPI) will cause a drop in real wages in an economy where prices are rising by something closer to 5-7%.
This is a very carefully hidden obstacle that requires either steadily lowering living expenses or being on a perpetual quest to find additional income sources. Many households are using credit to cover the difference, which is a strategy that’s destined to have an unhappy ending.
3. Conforming to a standardized idea of middle class life
When I was younger, if a family couldn’t afford a new car they bought a used one, and if they couldn’t afford that they bought a beater. If they couldn?t afford to keep their house, they sold it and moved to a rental or in with family.
But in the past 20-30 years, there’s been a kind of standardization of middle-class life? how one must live and what one must own to live in it. Call it the “TV version” of middle-class life. Many people can no longer afford to live this lifestyle, but they’re emotionally rooted in it and cannot abandon it. Once again, credit is often used to bridge the gap.
4. A benign view of debt
Culturally, debt is seen merely as a way to get from where you are to where you want to be. Want a house? take a mortgage. Need an education? Student loans can help. Can’t afford a car? All of these require little or no money up front and make the process easy.
Credit cards are just an extension of other forms of debt and a natural outgrowth. If the debt is what moves us forward? then how can it be a bad thing? Once you start thinking that way, you’re licked.
5. A culture that encourages debt at all levels
Credit is what moves the economy, isn’t it? At least that’s what we’re told by those who are supposed to know. Money is what moves the economy–how it comes into being is the real issue. We can either earn it or save it historically the preferred methods or we can borrow it.
The System for lack of a better term encourages us to borrow it since that’s the quickest way to make it happen. Once we have money whatever the source we can buy, buy, buy, and that’s what moves the economy. But when we use debt we’re also creating liabilities and they don’t go away once a paycheck shrinks or disappears.
6. A lack of orientation toward savings
Americans have a terrible track record when it comes to building savings, and we’re paying a huge price for it. Savings are the most fundamental antidote to debt when we have plenty of savings we’re self-financing and don’t need debt. Building up savings is the first step to getting debt out of your life, and that requires a fundamental shift in financial thinking.
7. Too much structural debt
Over the past 20-30 years, people have taken on too much structural debt. Mortgages and student loans are widely thought to be “good debt” but represent the foundation of even more debt. They’re long-term debt, which creates the need for ever more cash later, and if it worked when you bought your house or your education it can work with anything else you buy, right?
Mortgages and student loans can work if you don’t overbuy, then commit yourself to pay them off. For many people, however, mortgages and student loans set the stage for a lifetime of indebtedness.
8. An economic system that has a vested interest in keeping consumers in debt
Merchants have a symbiotic relationship with consumer debt more credit equals more consumers, equals more sales, equals more profit. They’ll often provide the credit for you, all you need to do is come in and buy. This situation exists at nearly every level of the economy and, along with the media, it works to lower our resistance to consuming and going deeper into debt.
9. Habit
OK, this one is comes closest to being a pure personal fault by a debtor. Like smoking, drinking, and overeating people get into debt, learn to live with it, and just continue on. If you want to break this cycle, it will require an effort comparable to a crash diet. Even though there’s long term benefit to doing it, the short term is uncomfortable and easy to avoid.
10. Debt has become a massive pyramid scheme
There was a time not long ago when lending was considered to be a fringe function in society; the old saying was before you can get a loan you first have to prove that you dont need it. No longer. Credit is very easy to get and has been for a few decades.
Because of that ease, lending has grown into a trillion dollar industry, with many layers. You can borrow with the swipe of a credit card, and when your revolving debt reaches the point where you can’t manage it, you can consolidate it with a home equity line of credit (HELOC).
When the HELOC gets stressful, you can consolidate it with a new first mortgage on your home. See the trend, If it weren’t so legitimized in our culture and economy, we might be able to identify it as the pyramid scheme that it truly is.
Nothing in that system is set up to encourage us to get out of debt, but just to roll it over to more tolerable loans.
As you can see, the obstacles to getting out of debt are enormous. It’s not just your bad habits and lack of discipline that are keeping you in debt, you’re getting a lot of help from a culture that’s keeping you in that ditch.
This isnt an attempt to give debtors a pass or to deflect responsibility, but rather to paint a full picture of the true obstacles.
If you have a serious amount of debt to payoff you need to
- Understand the big picture obstacles you face in trying to get out of debt
- Make a concentrated effort to resist those obstacles by setting and living by your own standards and preferences
- Be fully prepared to lower your standard of living as low and for as long as it will take separate wants from true needs
- Stop using credit going forward
- Be ready to increase your income if you’re paycheck doesn’t increase to cover the true cost of living or paying off debt, then be ready to do what you need to find additional sources
- Make savings and not borrowing, the standard of your financial success
- Once you’re out of debt, vow never to get back in.
You may not have the entire blame getting into debt, but rest assured you’re 100% responsible for getting yourself out.
What are Some Causes of Excessive Debt?
It has been easier to incur large amounts of debt. To be a debtor definitely does not indicate that one is irresponsible or immature; rather, sometimes debt is inevitable or even necessary. You are not alone.
In no particular order, following are some of the most common causes of debt:
1. Medical problems
Illnesses and unexpected medical emergencies can result in mass amounts of medical debt very quickly. While there is no way to avoid such expenses, per se, you can help to prepare yourself for life’s curveballs by maintaining an emergency savings.
2. Poor spending habits / Money management
It is essential to develop a monthly budget, and to stick to it. First, track all of your expenses for one week to determine exactly where your money is going.
This will enable you to cut back where possible so that you can save the “extra” funds. It is so easy to spend more money than necessary and to rack up debt by spending mindlessly.
3. Loss of employment
Particularly when one person in a household is the sole breadwinner, loss of employment can result in immediate money troubles. This is another scenario in which an emergency fund would be invaluable.
4. Underemployment
If you find yourself in a job for which you are over-educated or over-qualified, then you might be tempted to live as if your income is more in line with the job that you really want.
This is particularly true if you recently have been unemployed. While you may very well get that higher paying job in the future, it is important to balance out your expenses with your income as it is currently.
5. Lack of communication with your family
If you are trying your hardest to live frugally and to save each month, but your family members are not doing anything to further that goal (or vice versa), then your financial situation is not going to improve much.
It is crucial that you and your family are open and honest about earnings, what money is spent upon, and where costs can be cut back. You need to be on the same page, and with similar goals.
6. Relying on your credit cards
Credit cards should be valued for their convenience, but you should not be using them as extra income. If you are putting purchases on credit cards just to make ends meet, then you may be on the verge of serious debt trouble.
If you do not have enough money to pay for something in cash, then you really do not have enough to pay for it via credit card either.
7. Divorce
Few life-changing events have as dramatic an impact on finances as divorce.
8. Not allowing for “fun” within your budget
When money is tight and expenses have to be cut, entertainment costs often for the first to go. While this may be necessary, try to keep at least a small opening in your budget for leisure activities.
If you do not, then you might restrict your fun so much that you end up splurging on a large activity or expense to make up for your extreme cut-backs. In this case, you probably will end up spending much more than you would have if you had allowed yourself a little bit of entertainment in the first place.
9. Starting bad habits early
Though it may seem counter-intuitive, it actually is easier for college students to get credit cards than it is for the rest of the population.
Even though most have not yet established credit histories, lenders are willing to extend credit to college students because they assume that parents will help to pay off any incurred debt.
Without experience, it is easy to charge up unnecessary debt – which can lead to a pattern of poor financial management.
10. Too much credit card use
It is so much easier to swipe a piece of plastic than it is to hand over your hard-earned cash. Sometimes we get so caught up in the convenience of credit cards that we do not realize how much we have charged until the bill comes at the end of the month.
What are Some Warning Signs of Debt Problems?
You don’t have to run a bunch of numbers to figure out that you are in over your head. Here is a list of actual consequences of debt that can happen when you carry too much debt. It is important to head these warning signs, as many are part of the leading causes of bankruptcy.
Top Warning Signs of Debt Problems:
- Feeling stressed and worried – if you think you have too much debt, chances are, you probably do.
- Losing sleep – you likely have too much debt if it keeps you up at night.
- You spend more than you earn each month.
- Debt payments consume more than 20% of your net income.
- You can’t pay your bills on time.
- You’re receiving collection calls and letters.
- You live off of your overdraft and lines of credit.
- Payment of utility bills and housing bills often get behind.
- You’re transferring balances from one line of credit or credit card to another.
- You don’t pay your credit card balances in full each month.
- You don’t save any money at the end of the month because it all goes to interest costs.
- Your wages are being garnished.
- You’ve had subscriptions or utilities cut off for non-payment.
- You don’t open your bills and instead allow them to pile up for fear of the amount.
- You’ve been declined for debt consolidation by your bank because you are a high-risk borrower.
- You hide your debt or spending from your family.
- You can’t get new credit at a reasonable rate, or perhaps at all.
- You’re using cash advances on your credit card to make bill payments.
- You’re carrying more than one payday loan.
- You have no idea how much debt you have.
Rather than looking at how much debt you can carry, it’s better to look at the situation in reverse. How much money do you need to live?
Add up all of your living costs, including your rent or mortgage, food, utilities, transportation, and other personal costs. Add in a ‘cushion’ of 10% or so for incidentals you may have missed.
Now take that number and divide it by your income. If you need 80% of your income to cover day to day living expenses, your monthly debt payments can’t exceed 20% or you are in the hole.
The result of being in the hole each month is like the pressure building up on the side of a glacier. You will have to turn to more credit to balance your budget.
This increases your debt payments, increasing the pressure. This is one of the true dangers of credit cards. Sooner or later something crumbles.
What Should you do When you have too much Debt?
When you have a large amount of debt, you have to put more effort into paying off your debt while juggling payments on the debts you’re not currently paying.
Know Who and How Much You Owe
Make a list of your debts, including the creditor, total amount of the debt, monthly payment, interest rate, and due date. You can use your credit report to confirm the debts on your list.
Having all the debts in front of you will allow you to see the bigger picture and stay aware of your complete debt picture.
Don’t just create your list and forget about it. Refer to your debt list periodically, especially as you pay bills. Update your list every few months as the total amount of your debt changes.
2. Pay your debt regularly and on time
Late payments make it harder to pay off your debt since you’ll have to pay a late fee for every payment you miss. If you miss two payments in a row, your interest rate and finance charges will increase.
If you use a calendaring system on your computer or smartphone, enter your payments there and set an alert to remind you several days before your payment is due.
If you miss a payment, don’t wait until the next due date to send your payment, by then it could be reported to a credit bureau. Instead, send your payment as soon as you remember that it was missed.
3. Draw up a Monthly Bill Payment Calendar
Use a bill payment calendar to help you figure out which bills to pay with which paycheck. On your calendar, write each bill’s payment amount next to the due date. Then, fill in the date of each paycheck.
If you get paid on the same days every month—the 1st and 15th—you can use the same calendar from month to month. But, if your paychecks fall on different days of the month, you’ll need to create a calendar every month.
4. Make a Minimum Payment
If you can’t afford to pay anything more, at least make the minimum payment. Of course, the minimum payment doesn’t help you make real progress in paying off your debt.
But, it keeps your account in good standing, which avoids late fees. When you miss payments, it becomes harder to catch up and eventually your accounts could go into default.
Figure out which Debt to pay first
Paying off credit card debt first is often the best strategy because credit cards have higher interest rates than other debts. Of all your credit cards, the one with the highest interest rate usually gets priority on repayment because it’s costing the most money.
Use your debt list to prioritize and rank your debts in the order you want to pay them off. You can also choose to pay off the debt with the lowest balance first.
Pay off Collections and Charge-Offs
You can only pay as much on your debt as you can afford. When you have limited funds for repaying debt, focus on keeping your other accounts in good standing.
Don’t sacrifice your positive accounts for those that have already affected your credit. Instead, pay those past due accounts when you can afford to do it.
Be aware that your creditors will continue collection efforts on your account until you bring the account current again.
Use an Emergency Fund to Fall Back On
Without access to savings, you’d have to go into debt to cover an emergency expense. Even a small emergency fund will cover little expenses that come up every once in a while.
Read Also: Fighting Debt With Debt: America’s Penchant For Personal Loans
First, work toward creating a small emergency fund—$1,000 is a good place to start. Once you have that, make it your goal to create a bigger fund, like $2,000. Eventually, you want to build up a reserve of three to six months of living expenses.
Use a Monthly Budget to Plan Your Expenses
Keeping a budget helps ensure you have enough money to cover your monthly expenses. Plan far enough in advance and you can take early action if it looks like you won’t have enough money for your bills this month or next.
A budget also helps you plan to spend any extra money you have left after expenses are covered. You can use this extra money to pay off debt faster.
Recognize the Signs That You Need Help
If you find it hard to pay your debt and other bills each month, you may need to get help from a debt relief company, like a credit counseling agency. Other options for debt relief are:
- Debt consolidation
- Debt settlement
- Bankruptcy.
These all have advantages and disadvantages so weigh your options carefully.
If you think you have a spending problem, seek help through Debtors Anonymous, a debt-help group similar to Alcoholics Anonymous.
