Key Causes of Financial Trouble
We as Americans are heavily in debt. The average household has approximately $130,922 in debt, with most of that due to mortgages, auto loans, student loans, and credit card debt.
Unfortunately, these numbers may not be accurate. Most people under-report how much debt they actually have, so many statistics surrounding debt are lower than they should be. But how and why are Americans in so much debt? Read on to learn the key causes of financial trouble.
Keeping Up With The Joneses
This phenomenon is the habit is spending more than you have in order to appear like you are wealthier or better than those around you. If your neighbor buys a new boat, you buy a new boat AND two jet skis in order to look better. This is a dangerous trap to fall into that can lead to debt, unhappiness, and financial trouble.
It is important to realize that you don’t need to be better than your neighbors in order to find happiness. You need to be able to live within your means and spend less than what you earn to avoid credit card debt and potential bankruptcy. If you have a problem with living outside your means, you need to cut spending and find a way to get rid of the habit.
Not Separating Needs and Wants
Yes, you do need food, shelter, transportation, clothing etc. but you don’t need to eat escargot every day, live in a million dollar home, drive the latest Mercedes Benz, and wear designer clothing.
If you cannot separate needs and wants, your chances of falling into financial trouble increase dramatically. Before you buy anything, ask yourself “Do I really need this?” It may also be wise to go home and sleep about the purchase before you make it, especially if it is something major. Be frugal when you buy necessities as well, and decide what you can actually afford.
Create a budget based on your income, and live within your means. Housing is one of the largest monthly expenses, so start there if you’d like to cut expenses. Do you really need the home that you live in, or are you paying for a lifestyle that you cannot support? To find out how much you should be paying on housing, check out this blog.
Divorce
Divorce is a leading cause of financial trouble. From the lawyer fees, to the division of assets, divorce is messy, expensive, and never fun. You go from having two incomes to only one, or if you never worked before you will find it necessary to get a job. Divorce is funny in that it can break both your heart and your bank account.
If you have recently been divorced, dial back your spending and start focusing on the essentials. Buy only what you need to so that you can start to balance your pocketbook again. Try not to engage in retail therapy, as it will only make matters worse.
Addiction
If you are addicted to gambling, drugs, alcohol, or even shopping, much of your monthly income is wasted to feed your addiction (to read some interesting statistics regarding marijuana and financial troubles, check out this blog).
You can even become addicted to debt itself, perpetuating the problem. If you have an addiction, get help. There are many recovery centers across the nation that can help you change your life for good. If you have a friend who is addicted and needs help, interventions are not yet out of style.
Lack of Income
If you or your spouse loses your job and you don’t have an emergency fund, the sudden lack of income can lead to financial trouble. Chances are, you’ll start using your credit card a bit more, maybe take out a loan, and find yourself further and further in debt.
However, not everyone who loses their job is faced with extreme financial trouble. You can prepare yourself by creating an emergency fund of 3 months worth of necessary expenses, and by doing your best to save.
Illness
If you or a loved one has an unexpected illness, medical bills can easily go through the roof, especially if you do not have insurance. The first thing that you should do is make sure that there were no errors on your bill.
After you do that, see if you can negotiate the cost of your medical bills. If all else fails, turn to crowdfunding and other means of assistance.
Identity Theft
If you have been a victim of identity theft, you might suddenly find your bank account drained and a terrible credit score that you didn’t ruin. If you are able to catch the identity theft soon enough, you can cancel your card and shut down accounts that were opened in your name.
Most of the time, you can get things cleared, but it isn’t easy. You have to be proactive, and try your best to clear up what the thief did to your credit score.
Category: Family Finances, Financial Planning
