They say it’s smart to have between 3-6 months worth of expenses saved up in case 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, accrued debt is 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.
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 have a lot of accrued 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.