I’ve spoken with quite a few people about the current economic crisis and it seems to me that this is primarily a debt crisis. My question is this: isn’t debt almost always a crisis? When asked how “Main Street” would be affected, politicians, economists, financial experts get that deer in the headlights look and stammer, “Well, um, people won’t be able to, uh, get that car loan, or get the credit to start a new business, or funds to make their payroll.” I don’t know about you, but I’ve learned that debt begets more debt. We need other options, wise options.
Other than going into debt for large purchases (a business, a home, maybe a car), debt is almost always the result of some type of crisis, whether we recognize it as such or not. The main problem, in my opinion is the failure to research, seek out, explore, and use any other option. Always give yourself more options than just more debt.
Here is what I see as the most common reasons people wander into the debt trap. Most fall under the “failing to plan” rule.
1. Decreased income but no change to expenses
This happened to my wife and me when she quit work to stay at home with our first child. Actually, we didn’t have the “same” expenses, they actually went up and I never tried to make extra money. I put off making serious changes to my expenses out of laziness mostly, but it was also the desire to show friends and family that we were “doing okay” financially and new clothes, eating out, and moving into a newer, nicer rental home did that … in my mind. I let debt fill in the gap between where I was and where I wanted to be.
A close cousin to No. 1 above, I was one of those people who foolishly went to college, got bored, dropped out with no degree but lots of debt, and thought I would still be able to find a job making 6 figures. Brilliant, huh? Later, I went back to finish college and incurred more debt because tuition had risen substantially. In the meantime, I had taken some jobs that didn’t pay well. People like me, who experienced under employment tend to think of it as a temporary situation in order to generate a false sense of relief. Yes, it was temporary but I didn’t get my expenses in line with my current income at the time. If you’re currently in this situation, recognize that down the road, when you increase your income because of more hours, starting a business, a second job, or a better job, then is the time you can add back some of the spending you enjoyed before you became underemployed. But make no mistake, failing to rectify the situation will result in debt.
3. Poor money management
I was the poster boy for poor money management, never knowing how much I had in the checking account, nothing at all in savings, no plan, no future, and lots of debt. A monthly spending plan was an essential element that was missing in my financial life. For all I knew, the purchases I was charging could have been paid for by the savings from the hundreds of dollars I was wasting unnecessarily each month by not knowing where any of my money went. All I had to do to plan was simply write down my expenses and income and reconciling the two together. Once I started this practice, I was surprised at how great it felt to realize that I was making thoughtful and purposeful decisions about where and when to spend my money.
4. Medical expenses
Please, please don’t let your medical insurance lapse. I did for just a short 90 day period and the unthinkable happened. My wife had to have emergency (read: NOT optional) gall bladder surgery at day … #89. Do you think the insurance company stepped in and helped us out? If you do, I have some ocean front property in Kansas we need to talk about. Things like coverage gaps, lapsed policies, and increasingly costly alternatives make medical expenses a popular debt category. Think about it: do you know any doctors who don’t take Visa? They don’t accept it for convenience purposes. If a doctor doesn’t get paid at the time service is rendered, his or her chances of getting paid drops. Using a credit card at the doctor’s office means more debt for you, and less for them. In all fairness, they’re not in the lending business, but they do want, and need, to be paid.
5. Saving too little or not at all
For years, I fell into the not at all category. I wish I had learned this simple principle: to avoid unwanted debt always prepare for unexpected surprises by saving 3 to 6 months of living expenses. With an emergency fund in place, a job layoff, an illness, a new heating system, or a blown head gasket will not cause immediate financial strain and force you to go into debt. I always heard, “pay yourself first,” but I neglected to do so for years. Don’t make my mistake! Start an emergency fund today and it will be there when you need it. No one has ever regretted the wise decision of having a savings cushion.
Saving anything is better than nothing, and the hardest part of starting a savings plan is starting. Just put aside a set amount from each paycheck and refuse to touch it, no matter what. This money is separate from your emergency fund, so try to never confuse, or mingle, the two.
6. Financial illiteracy
Too many people lack a basic understanding of how money works, how it grows, how to save, how to invest for a rainy day, or even something as basic as why they should balance their checkbook. I, on the other hand, had no excuse because I had majored in Finance and Portfolio Management before dropping out of college my junior year. Most primary schools neglect teaching money management and your parents may not have sat you down and explained it. It doesn’t matter. You are responsible for your life and your money anyway. All that is in the past and there is nothing you gain by allowing resentment or regret take over your attitude. Learn from your mistakes and resolve to correct the failings of the past. Financial mistakes get worse over time and only get more complicated to resolve. Make the wise move and get educated and in control of your finances.
Three options you might consider are:
- Read financial blogs like this one and those in my blogroll.
- Read financial books and take notes.
- Take one of Dave Ramsey’s courses called Financial Peace University.
No matter if you call it America’s “new entertainment” or the Indian’s revenge (because of the rise in tribal casinos), there is a guaranteed exchange of money from you to “da house.” Rarely, exceedingly rarely, do you see gambling houses go belly up and there’s a reason. Gambling is a highly profitable enterprise … if you’re the house. It can be addictive, hard to stop, and loans to continue your gambling escapades on into the night are freely available from the nearby pawn shops and loan sharks. A casino could be the only place you can sign a contract to get an equity line on your house while intoxicated and it still be legal. This is entertainment? Add in the increasing addiction to online poker by using a credit card and you have the makings of a mountain of debt.
8. Counting on a windfall
As somewhat of an optimist, I have fallen for this line of thinking before, too. Many people are almost certain that someday, their ship will come in and they’ll receive that big check from the lottery, or from a long lost relative, or they’ll get a huge bonus, a “stock tip,” invent the next “big thing,” or get a cushy, high paying management job. Spending tomorrow’s money today is very tempting, especially if you mistakenly believe that “tomorrow will come” regardless of how the winds are blowing. Nothing is certain in this life, not even your job bonus, your tax refund, or your lucky number coming up. The inheritance from your parents or grandparents may get swallowed up in probate or you might be surprised at the reading of the will! The lesson is don’t spend the money until it is in your hands … and even then I would recommend waiting another 6 months to get your head on straight in the event you DO get a big windfall.
9. No money communication skills
For many years, my wife and I didn’t talk much about our finances. There wasn’t much to discuss! Looking back, I wish we had been more open with each other and I wish I had stepped up to the plate to initiate it. It is so vitally important to communicate with your spouse about your finances. If I had it to do over again, I would keep the lines of communication open, discuss financial goals and plans for attaining them, and discuss our different spending styles. If you are married to a saver and you are a spender, you’ll want to map out a strategy for you both to get what you want. Know what credit accounts you each have and promise each other to be honest about what each other spends. Many people find out that their spouses have racked up thousands of dollars in credit card debt and they had no idea that the accounts even existed. This often leads to …
The number of divorces is staggering. A significant number do it, and some more than once. Thankfully, divorce has never been an option for either my wife or myself and I can think of few things more expensive and likely to put you in debt. They say that getting a divorce is like converting all your assets into $100 bills, then you and your spouse putting the top down on a convertible, driving down a busy street and competing to see who can throw out the most money the fastest. Love is grand, but divorce is 100 grand. You were once in love enough to get married. Get counseling and make sincere attempts to salvage your marriage.
Going into debt is a decision, an active decision, in most cases. Yes, there are instances where you have limited choices (thinking medical emergencies here), but in most cases, debt is a decision, disguised as an excuse.
Make the decision to avoid debt.
This article was included in The Carnival of Personal Finance #173 at Girls Just Wanna Have Funds. Thanks!