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top 5 causes of debt

Top 5 Causes of Debt & How To Fix Them

They say it’s smart to have between 3-6 months worth of expenses saved up incase of an emergency. To give you an idea, if your monthly expenses round up to $5,000, there should be $30,000 sitting your saving account right now. But in this age of consumerism, people are likely swimming in debt instead of in a comfortable amount of hundred dollar bills. As of May 2016, 38.1% of all households carry some sort of credit card debt and according to the most recent survey from the U.S. Federal Reserve, the average credit card debt of U.S. households is about $5,700. That’s a lot of money to be sitting on credit cards that likely comes with an interest rate that will boost that debt even higher.

Sometimes, debt is accumulated from massive charges that are typically unexpected such as a medical emergency, a broken car or a divorce, but usually, debt is accrued over a longer period of time by charging common expenses like gas and groceries. These “small” charges here and there look unthreatening at first, but then it spirals out of control where you end up only paying the minimum balance each month, leaving you with more interest to pay in the future.

Here are the top 5 causes of debt and some suggestions for how you can get address the problem.

1. Divorce

The leading cause of arguments among couples revolves around money more than any other causes of typical domestic disputes. It’s likely that one or both parties had accrued debt prior to getting married and “what’s yours is mine” unfortunately applies to the bills too. Although it’s recommended to discuss money and spending habits before tying the knot, if couples don’t create a reasonable plan to paying off debt and spending money, it will lead to marital strife that can turn into divorce. The average percent of divorce in the United States is between 40-50% and the cost of getting divorced is $15,000-$20,000. Also going from a two-income household back to one can take a significant toll on your bank account.

2. Unemployment & Underemployment

No one expects to lose their job and it never comes at a good time. Unless you have the recommended 6 months worth of expenses stored in your savings account, you’re going to accrue a lot of debt sooner than later just to pay off your current bills and it’s possible that it’ll take longer than 6 months to get another job. There’s also the unfortunate occurrence of taking a pay cut when having to suddenly work part-time either due to having a child, a medical issue, or getting fewer shifts at work. We’re creatures of habit, so although our employment status might have changed, it’s very likely that our spending habits haven’t. People are typically spending more than they earn and recent studies have shown that although income is decreasing, the rate of spending is still climbing up, which leads to the next reason for debt.

3. Poor Money Management

Related to financial illiteracy, not many people have a good grasp of managing the money they earn likely because they were never taught the simple rules of spending and saving growing up. These people rely on credit cards for expenses and the idea of instant gratification is a major factor. It’s so appealing for us to buy something and have it now, but pay for it later. If you don’t pay off your credit card balance in full, you’ll end up paying a good chunk of it in interests. Most credit cards today have an interest rate ranging between 15-20%, making anything you buy cost a whole lot more than what you paid for. This also ties in with impulse spending and making poor financial decisions. Having a monthly game plan to tackle your common expenses will keep you from spending more than you make. It’ll also be a good idea to educate yourself on the rules of the bank, loans and credit cards to see if you can reduce your fees, avoid late charges and have 0% APR for a set period of time.

4. Minimum Payment Trap

So you racked up a credit card and can’t pay the full balance. You know you have to pay something on it so you set up your account to automatically pay the minimum every month and brush it off, feeling assured that payments are being made. Months later, you check your account and wonder why you still owe so much. Well, that’s interest for you! Here’s an example to give you an idea: If you owe $10,000 on a credit card and pay a minimum of $250 per month and your interest is 15%, you’re going to be paying $3,950 in interest in the 56 months it’ll take you to pay it off. That $10,000 easily turns into nearly $14,000 before you know it. If your interest rate is 20%, that payment towards interest becomes $6,617 and it’ll take you 67 months to pay it all off! That’s over 5 years of your life spent paying off this credit card while you’re stuck paying off your typical expenses too, such as food, gas, rent or mortgage and a car. Bottom line is that you should always pay the balance in full, but if you can’t, pay as much as you can as fast as you can.

5. Military Status

A recent study revealed that members of the military accrue debt at a higher rate than civilians and there are a number of reasons why. First of all, military members may be receiving a steady paycheck but it isn’t large enough to support their means, especially if they’re supporting a family, making them resort to credit cards to compensate. Next, frequently moving can add to the debt if an active military personnel is forced to sell their home and they can’t get an immediate buyer. They end up paying two mortgages until they receive an offer on their old home. It may also be difficult for the spouse to find a good-paying job right away during relocation. And finally, when military members find themselves in debt, they end up staying in debt because they don’t want their superiors finding out. They don’t seek out help due to their fear of losing their security clearance, ruining their chances of a career advancement or being discharged. This just makes their debt continually increase.

If you’re currently in one of these situations, there are a number of routes to take to reduce your debt, but the first step should be to come up with a spending plan and stick to it. Review your spending habits and see where you can cut down. Your daily cup of Joe at the local coffee shop can definitely add up in the bills. Pay your balances in full as often as you can and use cash if you’ve got it. People tend to spend less when they only use real money to pay. And most importantly, if you’re married, make sure you keep all lines of communication open and ask for help if you need it. In a perfect world, both parties of the couple will be savers but that’s an unlikely story. If you’re the spender, it might be a good idea to have your spouse manage the money until you’ve got a good grasp on saving more money each month.

If you feel like you’ve tried it all on your own and need professional help, one of our professional and friendly counselors here at Pacific Debt can talk you through your options. Our consultations are free and it’s our goal to get you out of debt for less than you currently owe.

Get out of your debt by changing bad spending habits

Debt Crisis Relief:  Changing Bad Spending Habits

Getting into debt is one of the easiest downward spirals any person can get caught up in. Everything in the western world is geared toward getting people to spend money and promotes consumerism. Furthermore, the ease of acquiring credit cards steers individuals toward spending money they do not have. The deck is stacked against consumers who cannot withstand the onslaught of credit cards, financing offers, and sales on expensive merchandise. Simply put, it is amazingly easy to get into an enormous amount of debt.

On another token, one of the hardest things to do in today’s world is to get out of debt. Sure there are classes, books, DVDs, and seminars galore meant to teach people how to climb out of the hole of debt, but in truth all of these are useless if the habits of the individual debtors are not changed. Five of the most common habits that should be changed to help a person get out of debt are listed below, but a look at one’s spending habits could reveal many, many more. Use the list below as a starting point in determining what bad spending habits you have. You might come to realize that you’re able to regain control of your debt situation much more easily than you think.

Eating Out

One of the leading causes of debt in the United States arises from the desire to eat great food. Many people think it is more convenient and less expensive to get great food by going to a restaurant. However, this perception is incorrect. For a family of four, the average bill at a sit-down restaurant such as T.G.I. Friday’s, Olive Garden, or Ruby Tuesday is somewhere between $45-60. This amounts to about a third of the average weekly grocery bill for a family of six!

The money spent on one meal at a restaurant could go toward paying one third of a grocery bill, high interest credit cards, or student loans. Reducing restaurant dining experiences from one or two per week to one or two per month would amount to enormous savings and a quicker climb out of debt.

Downloading Music on Your Phone or iPod

Although song downloads cost $0.99 or $1.29, the ease with how they download leads to overspending and feeds the “click and buy” mentality, increasing your amount of debt. Downloading ten songs may only cost $10 but over time it adds up and trains you into fulfilling your instant satisfaction desires. This leads to little or no concern about how the songs will be paid for in favor of being satisfied.

The actual downloading of music might not affect your budget all that much but the act of downloading anything off the internet or anything utilizing the “click, buy, and pay later” mentality sure does. The key here is to train yourself into not buying things with one click. Break the habit of downloading and paying later and watch your debt slowly decrease. You will be surprised how much more you pay attention to what you are buying when you break this small habit.

Paying With a Credit Card

Perhaps the hardest habit for anyone to break when trying to get out of debt is using their credit card. A lot of people state they are using their card to get bonus points or cash back and they will pay it off at the end of the month. Unfortunately, most people do not actually pay off the card at the end of the month and their bills skyrocket because of it. If you are one of the good folks out there that actually does follow through, either you need to keep doing that or get rid of your cards so you do not charge something you cannot pay off.

A good way to get yourself out of debt is to get rid of your credit cards. That is right, cut them up and get rid of them. Of course when you cut them up your debt remains, but getting rid of the cards will keep you from adding more debt to your total and will get you out of the habit of using them. The best way to pay for things is cash but if you do not like carrying money around, the only card you should have in your wallet or purse is a debit card which automatically withdraws money from your checking or savings account.

You will quickly learn that if you do not have any money in your wallet or in your bank account, you cannot buy something. If it is absolutely necessary that you buy the item you are looking at, then you need to adjust your budget so you can afford it. Not paying with a credit card will not only lower your debt and teach you to only spend the money you have, it will also make you think about those “must have but unnecessary” purchases and get the “need” purchases instead.

Smoking and Drinking

Regardless of what your stance on the issue is, a smoking and/or drinking habit is expensive. The truth is there is no cheap way for a person addicted to alcohol or nicotine to get the drug they crave. The good news is kicking either habit will have major implications for your health and your debt. If you have been trying to find a reason to quit either of these habits, take a look at the receipts from the liquor store or the tobacco shop and you will begin to see where a significant portion of your income is going.

Quitting cold turkey will have the greatest and quickest effect on your budget and your debt issues, but requires the most effort. Alternatively, weaning yourself off of tobacco or alcohol takes more time and causes strain on your budget to continue, but is easier to do from an addiction standpoint. Saving over $100-150 a month because you do not smoke or drink will dramatically change your fiscal standing.

Leasing (Not a House)

Renting an apartment or a home should not be looked at in a negative light unless you are spending above your means. As a matter of fact, many Americans are switching back to renting because owning a home is just too costly in the current economy. Keeping living accommodations out of this, leasing or renting anything is a big, bad, ugly, no-no for people looking to get out and stay out of debt.

If you take a moment to think about it, why do you want to pay $350 a month to lease a car when you can pay $250 for a car that you will own after all your payments are done? On the lease, you will have to turn the car in after three to five years; after you followed all the strict rules that go with a lease, and then you have to start renting all over again! On the other hand, you can buy your car, finance it, and in three to six years you will own it with no payments left to make.

The renting and leasing mentality can be applied to almost everything these days. You do not need to rent a television or a couch for two months from places like Rent-A-Center. Instead, save the money you need to buy one and be done with it. Leases are convenient little scams that cause you to pay out money each week or month for something that you can get yourself. If that television you want costs $50 a week to rent, save the $50 each week until you have enough money to buy the television.

Of course it could take a while to get the television if you only save $50 a week but it will teach you to pick and choose the things you really want to have and will actually make you appreciate the items you buy when you actually get them. Who knows, after two months of saving, one of your neighbors will be getting rid of their flat screen television and the $400 you have saved up will take it off their hands.

Get out of your debt by saving money every month

5 Ways to Save Money Every Month

Most people spend far more than they need to on things that don’t actually make any noticeable difference to their quality of life. Of course, there are obvious ways to start saving, such as eating out less, spending less on your hobbies and going on fewer vacations, but not everyone wants to sacrifice the things that they love most in order to start saving a bit of money for the future. Provided that you are not in a desperate state of debt already, now is a great time to start putting some money aside by cutting your monthly outgoings without having to lower your standard of living. Following are five money-saving considerations that you might be overlooking:

1 – Change Your Utility Providers

Things like heating, electricity, water, city tax and various other bills are things that everyone has to pay, but most people also pay more than they need to for the exact same services. Given that most utility industries are so competitive, it shouldn’t come as any surprise that there are many other options out there, some of which may be much more attractive to you. Thanks to price comparison websites, it only takes a matter of minutes to find out how much you could be saving by switching to a new utility company. However, don’t be attracted only by a short-term deal, and instead think of the longer term saving possibilities when choosing a new utility company.

2 – Change Your Phone Provider or Plan

Many people pay far more than they need to for their mobile phones, and consumers are often fooled by the lure of expensive new phones offered for free in return for an overpriced contract that is difficult to get out of. However, being another competitive industry, the cost of mobile calls, text messages and even mobile Internet, has dropped drastically in recent years, so there’s no need to be paying more than absolutely necessary. Unless you are a heavy mobile user, you will likely find it preferable to go for a prepaid plan so that you are not bound by any contracts or likely to fall victim to any surprise bills.

3 – Stop Paying Interest

Unless they are in the process of being paid off, most debts continue to cost you money in interest to the extent that the monthly payments can put a huge dent in your income. Irresponsible use of credit cards, overdraft, loans and other lines of credit can quickly lead to you spiraling deeper into debt. To avoid paying interest, pay off your debts as soon as possible, but if your income is not great enough to pay them off within a few months, you may want to consider consolidating your debts and transferring them to an interest-free balance transfer credit card or debt consolidation loan. This way, you’ll have to pay a one-time fee (on the balance transfer card), after which you’ll have a certain amount of time (typically six to 36 months) to pay off the debt without paying any more interest.

4 – Buy in Bulk

Buying in bulk, whether shopping for groceries, stationary, cleaning products or anything else that you use on a daily basis, is invariably cheaper than any other option. However, many people are put off spending a large amount of money in one hit, failing to take into account the long-term savings in the process. Instead, consider doing your grocery shopping at a discount supermarket, Costco, or other such venues that primarily cater to businesses seeking wholesale prices. You might need a membership card, but they are usually not difficult to get, and you can often borrow one from a friend without any problem. Saving money by buying in bulk also applies to things like subscriptions, whereby you can purchase things like computer software and prepaid mobile cards that will last you for a year or more.

5 – Change Your Banking Habits

Many people spend more than they need to on their day-to-day banking, either in overdraft interest fees, withdrawal fees, poor exchange rates abroad, money transfer fees or even monthly fees just to keep the account open. Your requirements will vary depending on your lifestyle and your priorities, but there are some tips that apply across the broad. For a start, if you use a credit card, make sure you only use it for emergencies, and be sure to pay the bill off in full every month so that you avoid paying interest. You should also consider opening a savings account if you don’t have one already, since you’ll be able to earn a small amount of interest on what you save, and it’s always wise to set aside some money for a rainy day. As is the case with just about anything else, you can compare bank accounts and other financial services online until you find something that better suits your particular requirements.

Saving money and getting control over your financial affairs is more about making a few changes to your spending habits rather than sacrificing the things you love. By taking time to more closely examine your outgoings, you could be surprised by just how much extra cash you can put aside each month.

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