How Debt Sneaks Up On Us

I am constantly harping on the damning effect of debt but it is time to identify the primary reasons people get into such financial predicaments. Following are the top 10 causes as I see it.

1) No Mentors - Unfortunately very few of us have good financial mentors. Nobody tells us about the pitfalls of credit. Too often, the very people who should be able to guide us in our financial decisions, such as teachers and parents, don’t really do all that well with their own money. Therefore, we are left to learn our lessons the hard way: By trial and Error. Sadly, most people whom I know that are financially responsible had to make mistakes and learn from their pain; then there are the ones who don’t even learn from their own mistakes.

2) Easy access to credit – It is no wonder we get into credit trouble. The credit card companies converge on new college students before they even unpack their bags. Stores are constantly trying to get us to apply for their cards. Banks advertise on TV and radio why we should get their cards. Auto dealers will hand a set of keys to almost anybody who has a job or a down payment if they will simply sign on the bottom line. We have even heard of dogs and dead people getting credit cards. With cavalier policies like that, ill informed consumers are doomed.

3) Failure to keep score – Budgeting is at the root of financial responsibility. It you don’t know where you are at or where you are going or how you are going to get there you might as well face a certain grim reality: You are lost. How can you possibility expect to “get there” if you have no idea where you are going? Get a realistic budget and stick by it. You will be surprised where your money goes.

4) Instant gratification - In our TV driven world we see crimes solved, remarkable reality TV accomplishments and sporting victories all portrayed as if there is no work involved. We are a lazy society, susceptible to sales pitches about quick fixes, instant food, over-night romance and lottery winnings. Ryan Healy calls it Premature Lifestyle Enhancement. But, very few people have an incentive to tell us about the importance of discipline, hard work, practice and perseverance. If we only hear about the glamorous life, how can we be expected to restrain ourselves?

5) Unwise spending choices - We pay too much for everything from mustard to vacations. When you buy the smallest jar of mustard, you are paying the most per ounce for it. The same about anything else you could buy in bulk and save money. By overpaying for so many things your money does not stretch as far as it could, and this leaves you with unnecessary debt. You should start thinking about using coupons, buying out of season, and getting larger quantities of non-perishables.

6) Excitement – There is a certain flush of power or adrenalin when we buy things. It makes us feel important. We see so many other people throwing money around we want to project a certain degree of prosperity ourselves. So we pull out our credit cards and buy all sorts of things we don’t really need. Before long, our credit cards are at the max. Like all other bad habits, unnecessary spending can become an addiction. We tend to justify such purchase with thoughts like “I deserve this.” But that is actually a counter-productive instinct. Gomestic says that in large part, people make purchase this way to counteract the feeling that nobody cares about them. The truth is that such impulsive purchases deny you the more important items that you really do deserve.

7) Bummers - If you are like me, you are constantly surprised by the unexpected monetary demands that come knocking at the door. When we don’t save for the proverbial “rainy day”, we are not prepared for life’s setbacks. That can easily mean that other debts do not get paid off or we use our credit cards to get by. Here is a good article about "Avoidable vs. Unavoidable" debt.

8) Minimum payments - If you think in terms of “what is the least I can pay” rather than “What is the full amount of the debt” you are asking for trouble. If you don’t pay off your cards every month, the lenders attach interest charges that prohibit using that money for other items. When you get paid you find yourself thinking “who do I owe this to” rather than “How do I want to use this money” Pay off your statement in full every month and you will be much more careful about what you buy.

9) Excessive refinancing – In years gone by, people tried to pay their homes off. But more recently, the masses have looked upon their homes as an additional source of income. Every time the home value goes up, they run out and refinance to get some of the equity out. That is troublesome on several levels. First and most obvious, they owe more for their homes and their payments go up. Second, it sets a false sense of financial health. As long as the consumer can refinance her way out of debt, she sees no reason to exercise restraint in her spending. I have known quite a few people who have run their credit cards up then refinanced their homes multiple times to pay off the debt. Each time they convince themselves they will not do that again. However a year or so later the credit cards are at their limits again and they repeat the process. Sadly, we all know what happened to the housing market a couple of years ago and the gravy train stopped but the debt remained. Many of those people went broke.

10) Imitating Ostriches – I weigh too much and I rarely step on a scale; partly because I don’t really want to know just how bad my problem is. The same thing happens to people who are wrestling with their finances. They know they are struggling, but they just don’t want to know how bad things really are. We can both solve our problems if we would just pull our heads out of the sand, examine the truth and act accordingly.

There are many other reasons why we get into too much debt. Which ones do you think are worth mentioning?

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