5 Most Common Themes of People Getting Into Debt
It’s not uncommon to see headlines about debt statistics, especially as our beloved country is being burdened by the overwhelming COVID-19 pandemic. To add to that, it is virtually confirmed that our current vaccines will have no protection over future variants. We don’t know when this pandemic will end, or will we have to accept it as a part of the rest of our lives?
Because of this abnormal situation, many businesses and the global economy have taken a hit. This, in turn, has caused many households to lose their income streams, wiping out their entire life savings, and pushing them into debt just to survive this period.
Managing finances is not a seasonal job, it’s an ongoing process that stretches beyond a pandemic or an unfortunate situation. To keep yourself out of debt, it pays to reverse engineer the process and figure out the biggest causes. Then avoid it altogether.
1. Maintaining a certain lifestyle
Your neighbour just bought the new Mercedes, your Facebook friends are partying on a private yacht, your Instagram friends are posting about having the latest iMac, and your brother-in-law just got the keys to his new house twice the size of yours. While the self-help gurus will tell you to channel that energy into creating something, it can also really sting as you feel like falling behind. It’s called lifestyle inflation.
And then you’ll start feeling the pressure of needing to keep up with their pace. Their spending, the brands they’re using, the horsepower in their cars, the graphical processing power in their computers, and even the food that they eat.
But that’s a recipe for disaster.
Chasing an extravagant lifestyle you can’t afford will leave you financially dry, if not burning a hole in your wallet. This debt spiral can easily get out of control and overwhelm your well-being. Don’t get it wrong, it’s not healthy to deprive yourself of nice things and vacations, but trying to keep up with others isn’t going to give you any returns either.
2. More than a basic financial literacy
Finance is not just a huge part of our lives, it’s a huge motivator of why certain people and businesses take certain actions.
Being financially literate doesn’t just mean understanding financial terms, but also knowing how, why, and what to invest in. And then learn about the different ways an individual can achieve the investing targets.
A misconception that paralyzes many adults is assuming financial education has an end or that one can graduate from it. It’s quite the opposite. What caused the market collapse in 1929 may not be relevant in 2021. It may rhyme, but it will not repeat.
3. Job loss
A job loss is definitely a factor that has the biggest impact on a person’s livelihood. It’s their primary source of income, and for many, the only. When something like this happens, particularly if it’s unexpected and without warning, you’ll quickly get swarmed by the mountain of bills you still need to cover despite having no income. And debt quickly follows.
It’s also key to practice a lifestyle where you live way below your means. That way, even if you’ve lost your source of income, you won’t find it as hard to overhaul your lifestyle or dip into the depths of your emergency fund.
Or, better yet, build multiple streams of income, so even when one fails, you still have a backup income. Albeit a smaller revenue stream, it buys you the time needed to sort things out.
4. Poor management of credit card
Some people find it incredibly hard to control their spending. It’s not entirely their fault either when today’s world is plastered with advertisements. The latest iPhone, the sleekest looking watch from Tag Heuer, getting a nice meal with some friends, the à la mode Nike sneakers, on top of Netflix and Disney+ subscriptions, it can get burdensome in most cases.
It’s not because they’re chasing after a certain lifestyle, but because it’s fun to splurge on items.
It’s fine when it’s a planned activity, but not when it’s become a habit and use more credit than you should. Management of credit is arguably the most important part of using credit. You need to be responsible for what you spend and not take it for granted.
If that’s the case, then automate your credit card management with modern technology like Finory. Let it give you an insight as to how you spend. Then at least you know your behaviour from a third-person perspective. Finory even takes it one step further with its “estimated recurring” feature, which allows users to estimate their monthly spending.
5. Unexpected expenses
A commonly overlooked factor that causes many people to go into debt is not expecting the unexpected. Or that they know something is bound to happen but just aren’t prepared for it. These are things like a recession, getting sick, plumbing problems, wedding costs, etc. And then there are things that are unexpected such as getting into a car accident, natural disasters, or a pandemic.
These items can easily wipe out your entire life savings if you’re not prepared or properly insured against them. The solution to this is, again, a robust emergency fund.
In short, when things are going great, don’t forget that things may not be as great one day and it’s good to be prepared. It’s not being pessimistic, it’s learning how to survive.