We spend a lot of time talking about how to get out of debt on this blog. But it’s far more important to avoid getting into debt in the first place. How do you get into debt? My experience tells me there are 9 main reasons. Let’s examine these debt traps and discover what to do in order to stay clear of them all.
1. Lose Your Job
There is a saying that most people are only one paycheck away from bankruptcy. Does this describe you? If you were to lose your job tomorrow, would it throw you into debt? If so, don’t feel bad about it there are many people who share your plight.
Losing your job is the easiest way to get into debt and something you may think you have no control over. But as you’ll see, that’s not necessarily so.
Basically, there are two approaches you can take to fill this potential pot hole on the road to financial success.
First, you can eliminate this debt risk factor by diversifying your income and become your own boss. The best way to do that is to start a side business. Don’t think you need a pile of dough or tons of time in order to launch your own small business or become self-employed. There are plenty of entrepreneurial ideas you can start with very little money and many don’t require all that much time commitment either.
This is not a solution you’ll be able to put in place overnight of course. It will take work, time and dedication. But it’s a great way to mitigate the risk of losing your job.
The second approach to becoming “fire-proof” is to become indispensable at work. This is a topic that requires a post in and of itself. But the principle idea is to become so important at work that they can’t do without you. If you follow the suggestions I’ve provided on how to get a raise, you’ll have all the firepower you need to accomplish this task.
By diversifying your income and becoming more necessary than air to your boss, you’ll take great strides towards never losing your job and thereby staying clear of debt.
2. Fail To Budget
I’ve heard it said that those who fail to plan, plan to fail. The same thing could be said about budgeting. Those who fail to budget, budget to fail. I’ve mentioned the importance of tracking your spending non-stop since I started this blog for good reason. It’s the biggest reason people get into debt and/or fail to achieve their financial goals. The shame is that this problem is completely avoidable. All people have to do is track their spending and set up budgets.
Think of budget tracking as an “early warning system”. You wouldn’t get on a cruise ship if it couldn’t detect dangerous sea conditions hours before the ship hit the storm…right? The same principle applies with money. If you set up budgets and track your spending against it you’ll know if there is an issue that needs attention long before it becomes a problem.
Make sure your financial ship stays afloat and navigates around those coral reefs long before you start taking on water. Track your spending against budgets you set up.
3. Health Problems
Health problems are a horrible agent of debt. You get sick. Your bills pile up. Your income goes down (or disappears). And worse….you don’t have complete control over your health. Frightening.
While this is indeed a scary thought, there are many steps you can take to reduce the risk of illness throwing you into debt. First and foremost, live a healthy lifestyle and buy the right health insurance. Of course you’ll live a fuller life if you do this. And as a side benefit, you’ll save a bundle on health care. Just do it my friend.
Now I’ll admit that you could be super fit, have the best insurance in the world and illness may still befall you. But that doesn’t mean these situations have to derail you financially.
If you want to guard against unforeseen emergencies (health or otherwise) the best steps you can take are those I’ve outlined above – diversify your sources of income and budget. If you diversify your income you may be able to continue a side job even if you become disabled. And if you budget and build up a buffer account, you may be able to tide yourself over until your health returns.
These will not fully insulate you from any possible future financial calamity. But having a variety of sources of income and tracking your spending will absolutely better equip you for the financial road ahead – no matter what happens to be on that highway.
4. Expensive College
The average college student graduates in debt. Sometimes that is unavoidable. But there is very little justification for going into debt in order to attend a prestigious school.
There is nothing wrong with getting a degree (although there are plenty of great jobs you can get without going to college for 4 years). And if you can get your degree and save a few shekels along the way, what’s wrong with that?
The people I speak with who graduate college with high loan balances always tell me if they could go back and get their education differently and less expensively they would. There are a few exceptions of course but in the overwhelming majority of cases you can get the same degree without spending a king’s ransom.
Overall, people who graduate from fancy-pants colleges don’t make more money than those who graduate from a state school*. And the statistics prove that where you get your undergrad degree has nothing to do with how successful you are in your career. Don’t assume you need to go into debt in order to get a good education – it’s just not true.
5. Credit Cards
It’s very easy to fall into credit card debt. That’s because they make it so simple to spend money you don’t have. I don’t know about you but my eyes are much bigger than my stomach (unfortunately my belly is catching up fast). My “wants” trump my “needs” and priorities – unless I’m super careful. What is the best defense against credit card debt? If you guessed “budgeting” you got it right.
I’ve heard it said that there is nothing worse than being married to the wrong person. Fortunately, I married the right person so I wouldn’t know about that. But if you suffer under the tyrannical yoke of the wrong partner, there is no amount of money on earth that you should spare in order to get free.
But if you are single, you should understand that your partner is going to have a huge impact on your financial future. Think time and time and time again before you get hitched. Make sure you and your sweetie pie function well as a financial team. Divorce is an iceberg that can sink any financial ship. The best way to avoid this problem is to marry the right partner.
7. No Flexibility
Obviously you have to earn more than you spend if you want to remain solvent. But even if you have this covered now remember that things change. If your income drops for whatever reason, you must adjust your spending immediately. If you neglect this step you will come in for a very hard landing. It’s not pleasant.
This is the reason why I love tracking my spending every month and sending reports to my wife and kids. I want everyone to have the information they need in order to make smart spending decisions given the situation as it is today. I don’t want them spending money we used to make but no longer do.
8. Ignoring What it Really Costs You To Live
When you think about what it costs you to live, you probably think about your mortgage, groceries, utilities etc. These come to mind because they recur every month. But you have many other expenses as well. Some occur every quarter or year (car insurance or property tax). Others occur far less often like the cost to replace your auto or roof.
These are annual expenses and people often ignore them until they have to write a check. That’s a mistake because usually when these “emergencies” come up, they don’t have the money for them and as a result they go into debt. This debt problem is completely avoidable. The solution is to set up a sinking fund.
All you have to do is get a rough estimate of the replacement costs and the expected life of your household appliances, roof, automobile etc. Do this for anything that is durable but does wear out little by little.
Next divide the replacement cost by the number of years you think the item will last. That gives you the annual depreciation cost of each item. Add up the depreciation cost for all the items you will have to replace at some point, divide that number by 12 and that number is your monthly depreciation cost. If you take that number and build it into your budget, you’ll have the money you need when you need it. Nice.
9. Being In Debt
Being is debt is a great way to stay in debt. That’s because debt is expensive. If you have high-interest debt you might be taking a good chunk of your monthly budget and sending off to your creditors. No good “mon”.
Refinance your debt with lower cost alternatives. Take the money you save in lower interest expense and apply it to the debt. Since you’ll have more money paying down debt and less money paying off interest you’ll get out of debt much faster. “Schweet”.
These are the top 9 reasons people find themselves in debt. As you can see, budgeting is probably the most powerful tool in your arsenal to defeat debt and having a side income is a close second.
Nobody knows what the future has in store. As imperfect as this answer is, all you can do is the best you can do. These 9 steps detail exactly how to best protect yourself and family from the scourge of debt. Are you willing to take these steps? Why or why not? When? What other tactics should we know about that can help us avoid getting ever getting into debt?