Avoid the Debt Spin Cycle

Consumer debt is on the rise. Unfortunately, when people struggle with debt, society tends to judge them, labeling them as irresponsible or lazy. But the root causes of debt can greatly vary. Job loss, unexpected medical expenses, and the inflationary pressure of rising food and housing costs can all result in more household debt.

If we accept the premise that no one truly wants to live in debt, then why do so many fall into financial trouble and why is it so challenging to recover? When you understand the symptoms, you’re better equipped to make more informed financial choices, better plan for the unexpected, and more effectively manage your money.

Here are a few of the common reasons people fall into debt:

 Lack of Financial Education: Some people just don’t understand how money works because financial literacy isn’t widely taught in schools or homes. People who are financially illiterate have trouble managing finances, making them more vulnerable to scams and poor financial decisions.

 Family Influences: For many families, talking about money is taboo. And poor money decisions can lead to family stress and arguments. These early life lessons can result in young people believing financial-related discussions should be avoided. This can get in the way of basic things like budgeting, balancing a checkbook, and paying attention to credit card balances.

 Difficulty Adapting to Change: When someone loses their job, logic tells us it’s time to cut expenses. But many people are slow to alter their spending often thinking the changed circumstances are only temporary. Then when they finally adjust their spending habits, it can be too late to dig out of debt.

 Divorce: Many married couples are used to two incomes. Splitting assets and learning to manage expenses on a reduced income can be financially overwhelming. Plus, there’s the legal bills associated with a divorce. Adjusting to this new reality can be a significant challenge for everyone involved.

  Peer Pressure: Some people strive to “keep up with the Joneses” by buying houses, cars, clothing, and vacations they can’t afford. Living beyond your means often leads to excessive credit card spending which can put someone in a debt spin cycle.

 Addictive Behaviors: We all know someone who’s a ‘shopaholic.’ While these labels are given in jest, shopping addictions are as real as gambling and alcohol addictions. They are no laughing matter. Using shopping to compensate for a terrible job or unhappy marriage, or to fulfill other unmet needs, leads to spending money you don’t have.

 Student Loans: It’s no secret that student loan debt is out of control. The high cost of tuition is a big reason for this. But many use student loans to finance a lifestyle. College students often attempt to maintain the standard of living they had with their parents when they start living on their own. Students would be wise to live like a college student when they’re in school so they don’t have to live like a college student after they graduate.

 Spending Money Before It’s Earned: It can be tempting to look down the road. Who hasn’t imagined what they’d do if they won the lottery? We can end up in real trouble when the money doesn’t come through. It’s better to wait for that promotion or end of year bonus before buying the new TV. And while Uncle Harry may have promised you his fortunes after he dies, don’t buy that luxury vacation just yet. As the saying goes, ‘there’s nothing so uncertain as a sure thing.’

  Poor Communication: In relationships, differences in spending and saving habits can lead to financial issues. Avoiding discussions about money or hiding debt from a partner only makes the problem worse. When it comes to money, get on the same financial page.

Over Dependence on Credit Cards: It’s not too farfetched to say that credit cards are the root of all financial evil. Credit cards can be useful when managed the right way. But too often, people use them to bridge a gap in their finances. One more dinner out or one new pair of shoes can be the tipping point for a monthly budget. Then when credit card bills aren’t paid, high interest rates take over. The result is a chasing-your-tail scenario to dig out of debt.

When it comes to managing your finances, remember that community banks, like American Bank, are a valuable resource. Most banks have great savings tools that can help you wisely manage your income. And American Bank provides a free, online Personal Finance Management Tool that can help you set a chart for financial success. This tool is designed to help you track and categorize your transactions, analyze your monthly spending habits, establish budgets, create a debt-payoff plan, and notify you when you overspend.

Learn More About the Personal Finance Management Tool

Learning financial literacy doesn’t have to be through the hard-knocks method. Once you understand the root causes of debt, you’re better equipped to know what to watch for in your own financial life.