Getting into debt is something that can sometimes feel like it creeps up on you and you find yourself in a bit of a hole without seeing the warning signs beforehand.
It can be all too easy to lose a grip of your finances for a variety of different reasons but it can be much harder to get yourself out of a tight spot once you have accumulated debt.
Here is a look at some of the primary causes that tend to lead people into debt and how to spot the warning signs before its too late.
Living with your means
Many people don’t get into debt because they are reckless with their finances but the root cause of may financial problems is overspending on a regular basis.
Overspending is probably one of the biggest causes of debt and it stands to reason that if you end up spending more money than you earn each month and every year, it is going to catch up with you at some point.
The most obvious way to avoid this scenario is to work out a budget for your monthly expenses so that you know how much you can spend and how much spare cash you have left after paying your bills.
If you are in greater control of where your money is going and how much you are spending this should help to reduce the prospect of overspending.
Medical bills, tax bills, and repair bills are some classic financial shocks that can create a big hole in your finances.
What can happen in this situation is you end up taking out a loan or putting an expense on a credit card, but then struggle to pay it back alongside your regular financial commitments.
One way of resolving this issue could be by consolidating your loans so that you have a chance of getting the best rates and pay less in interest charges than if you were paying off a credit card or loan that is charging a higher interest rate.
Keeping pace with inflation
It is an unfortunate fact of financial life that the value of your money is constantly being eroded by inflation.
The cost of living tends to rise each year and if your wages and spending habits do not adjust sufficiently to account for this rise there is a good chance that you will start to accumulate debt without even noticing it at first.
Shop around for the best interest rates on your savings and keep a close eye on your budget to see how inflation is impacting on your monthly costs.
The insurance conundrum
Taking out an insurance policy can feel like a waste of money when you pay for years without making a claim, but the consequences of not having coverage when disaster strikes can have a serious impact on your financial wellbeing.
If you can afford some life insurance and health insurance this could avoid you falling into a debt situation if you find yourself unable to work or needing to pay for an expensive medical bill.
Lack of information
It is understandable if you don’t really know how some financial products actually work, especially the more complicated ones that are linked to stock market investments, but a basic financial knowledge is a good thing to have.
It often pays to give yourself a financial education and a basic grounding so that you appreciate what you are signing up for when you take out a loan or sign up for a credit card.
If you become savvier in this area it could help you avoid taking on debt that could be viewed as a bad financial decision in hindsight.
More mouths to feed
A growing family is another big cause of debt problems for plenty of us.
Starting a family is an exciting time in your life but it can create some serious financial pressures too.
If you have to start paying for extra things for the kids it will often mean that you have to cut back on another spending to avoid getting into a debt situation.
Poor investment decisions
If you do have some spare money invested you want to be sure that the cash is working as hard as possible for you.
If your investments are keeping pace with inflation or lose money over a period of time it could end up making your debt situation worse than it could have been.
Consider getting some professional investment suggestions if you are not sure how to invest in the best potential returns.
The effect of expensive debt
Not all debt is equal and it stands to reason that if you take out a loan that is interest-free over 10 months, for example, that is not going to be anywhere near as damaging to your finances than if you were to pay for the item on your credit card.
Take a look at the interest rates you are paying for each loan and card that you have and try to make a plan to clear the most expensive one first as a priority so that you reduce your debt exposure and pay less in interest charges.
Having kids costs you, as already mentioned, but the bills can get even bigger when its time to go to college or university.
Paying for your kids to go through college can create a debt situation unless you plan for it well in advance and have some money put aside for those expensive years in further education.
In summary, it is not always possible to avoid accumulating debt in certain situations but there are certain actions you can take to try and protect your finances from serious damage.
If you can become more financially disciplined and keep a close eye on your spending by budgeting every month you stand a better chance of avoiding a nasty surprise when you discover just how much debt you have accumulated without even knowing it.