Understanding Debt and Avoiding Debt Trouble
No one really makes the decision to get into too much debt. However, a large debt load is certainly something that a person can fall into without realizing it until it’s too late.
There are many different reasons why people get into debt. Everyone’s financial situation is unique and no two stories are exactly alike. However, there are certain commonalities that exist and these commonalities can be used to help people avoid debt trouble – and get out of debt if they’re having issues.
Here are several ways that people end up in too much debt.
- Lack of a budget
- A budget is crucial if you want to avoid debt troubles. Otherwise you could run into several problems.
- If you don’t have a budget, you won’t know how much you are spending each month. It’s easy to lose track of your bills and expenses if you aren’t writing them down and keeping yourself organized. Tracking spending is an excellent way to avoid debt trouble. Write down everything you spend money on for at least a month so you can get a good idea of where your money is going.
- You will also need to make sure that your expenses do not exceed your income. Figure out exactly how much you make each month and do not depend on bonuses or tax refunds to help you pay your bills.
- One you know how much you make and how much you spend, you’ll need to make it balance. If you don’t have enough money coming in each month to cover all of your expenses, then you’ll need to make cuts so that you can afford everything.
- Little savings
- An emergency savings fund can keep you from getting into debt trouble. Unexpected things happen in life. Your car could break down, your roof could leak, or you could lose your job. If you do not have an emergency fund, then you’ll most likely need to go into debt in order to pay for unexpected expenses.
- It can be tough to save money when you’re on a tight budget and you’re living paycheque-to-paycheque, but every little bit counts. Take a look at your budget and see where you can make cuts. Then make a plan to put some extra money aside each month. This will become your emergency fund. Make sure to only use this fund for actual emergencies and come up with a plan to replenish it when it runs low.
- Not understanding debt
- Most people have some form of debt and one of the most common forms is credit card debt. Anyone who has a credit card runs the risk of getting into trouble with credit card debt. Unfortunately, credit card debt is among the toughest types of debt to pay off, since most credit cards have very high interest rates.
- There are several ways that people get into trouble with credit cards. One is by buying things on credit that they can’t afford.
- Another way is by losing track of how much they owe on their credit cards.
- Paying off only the minimum balance is also a big issue. It’s crucial to understand how debt works and how paying down debt works. If you only pay the minimum balance each month, not only will it likely take you a very long time to pay off your debt, but you will also spend a lot of money on interest charges.
- If you use a credit card, make sure you fully understand how your card works, and that you have a plan for repaying your debt in a timely manner. Understand when you are charged fees, how much interest you pay on your card, and when your interest rate goes up. Having this information can keep you from getting into debt trouble.
- A lack of communication
- Families need to communicate about spending and debt. For example, couples will need to map out a financial strategy that allows both people to achieve their goals without taking away from one another’s financial plans and the overall goals of the family.
- Be honest with your spending and do not try to “hide” your debt from your partner. They will find out and, when they do, the issue could be too large to easily deal with.