8 Common Causes of Debt — And How to Avoid them
8 Common Causes of Debt — And How to Avoid them
By Tim Lemke
Debt plagues millions of Americans every day. It is such a common problem that many of us don't even think twice about what we owe, or how we landed in such a predicament.
The simplest explanation is that debt happens when you spend more than you earn. But it's not actually that simple when real life steps in. Unexpected events, bad planning, and even a decision to pursue an education can leave you facing big debt that may take years to pay off.
By understanding some of the main causes of debt, we can make better financial decisions in avoiding it. Let's take a look at some of the worst offenders.
1. Medical expenses
Medical costs have long been one of the leading causes of bankruptcy in the United States. Even those with health insurance are not immune to medical debt. An illness, injury, or health condition can cause bills to quickly accumulate.
The Kaiser Family Foundation found that three in 10 Americans report that they or a household member have had trouble paying medical bills in the past year — 58 percent of which were affected in a way that had a major impact on their life. More than 60 percent of respondents claim their savings were wiped out. Another 37 percent turned to credit cards.
It's not easy to predict how your health could change in the future. Actually, it's almost impossible. But putting certain safeguards in place can help mitigate the risk of financial ruin.
Health insurance is the first step. And while premiums can be expensive, facing an illness or injury without that coverage would be infinitely more devastating. (See also: The One Question You Need to Answer to Choose the Best Health Care Plan)
It's also critical that you build an emergency fund. This savings cushion should ideally cover six months' to a year's worth of your living expenses. If the worst happens, you'll at least have something to fall back on. (See also: 7 Easy Ways to Build an Emergency Fund From $0)
2. Loss of income
Losing a primary source of income can severely hurt your bottom line. Maybe you were laid off or fired, or had a sudden decline in revenue for your business.
Maybe you needed to stop working to care for a child or older relative. Or perhaps your health took a turn, and you were forced to retire early or drop to part-time employment. When something like this happens, it's easy to find yourself overwhelmed by bills and expenses. Debt can quickly follow.
One of the biggest safeguards you can establish for yourself, again, is an emergency fund. Ideally, this fund can sustain you while you try to replace your lost income. Is your emergency fund as big as it should be?
It's also key that you try to live well below your means at all times, even when money is good. This means spending more on "needs" and less on "wants." This way, even if your income drops unexpectedly, you'll find it easier to get by at your current lifestyle without dipping into that emergency fund or creating new debt.
3. College costs
Going to college can be very expensive, and many young people find themselves saddled with debt early on in their lives. The average class of 2016 graduate left school with $37,172 in student loan debt. Those student loans can force a new graduate into even more borrowing, which only furthers the debt cycle.
Parents can help young people with college costs by saving up, often with the help of 529 college savings plans and similar programs that offer tax advantages. If you are a student who is not fortunate enough to get help from family, you can reduce or even eliminate your student loan burden up front in a number of ways.
It helps to select schools based on overall value, rather than prestige. It's generally cheaper to go to school in state, and public schools are often less expensive than private ones. Spending two years at a community college and transferring to a four-year college is often a great way to save. (See also: 7 Things Employers Care About More Than Your Degree)
Working while in school can help offset costs. Many schools will help students find on-campus jobs. And there's usually no harm in deferring the start of college for a year or two while you save money. (See also: 8 Money-Saving Hacks Every College Student Should Try)
There is also new information being published about the "return on investment" of college degrees that can guide students to available and well-paying jobs. (See also: 8 Great Jobs for the Next 10 Years)
Avoiding college debt may force students and their families to make difficult choices, but they are choices that will help a young person start their adult lives off on the right financial foot.
4. An unexpected emergency
Many people find themselves in debt because they aren't prepared when big, bad, expensive things happened to them. Your entire HVAC system may go haywire and need to be replaced. You may crash your car. Or you may get really sick, and find your insurance will only cover a portion of your bills.
To keep these scenarios from wiping out your savings and leading to debt, you once again need to bolster that emergency fund. A sizable emergency fund can help cover big one-time expenses so you're not tapping into credit cards or taking out loans.
You may have to anticipate possible big expenses to some degree. How old is the roof on your house? How old is your car? How's your health, in general? It's impossible to know the future, but you can prepare yourself for certain outcomes. (See also: 4 New Reasons You Need an Emergency Fund)
5. Being poorly insured
Insurance is a funny thing. It can seem like a waste of money … until you need it. Many people find themselves in serious debt or even bankruptcy when a bad event hits and they are uninsured or underinsured. Imagine having your house burn down without homeowners insurance.
Imagine purchasing a bare-bones health insurance plan and getting into a serious car accident requiring a lengthy hospital stay.
Insurance is a very important part of financial planning. Every person should periodically conduct a thorough review of their insurance policies to ensure they have plans that cover them in case of a bad event. No one wants to think about bad things happening to them, but without insurance, those bad things can really sting you financially. (See also: 5 Reasons Why Life Insurance Isn't Just for Old People)
6. Keeping up with the Joneses
Your neighbor just bought a new sports car. Your Facebook friends are sharing photos of their latest tropical vacation. Your brother-in-law just purchased a home twice the size of yours.
It can really sting when you feel like you have to go without. And like many people, you may feel pressure to "keep up" with your friends' lavish lifestyles.
This is a recipe for financial disaster.
Chasing a lifestyle you can't afford will have you turning to credit cards to fund your frivolous buys. The spiral into debt can be quick and overwhelming. Showing off isn't worth your financial wellbeing.
No one is implying you don't deserve to treat yourself to nice things or vacations once in a while; but if you can't actually afford those things, what favors are you doing yourself?
Keeping up with the Joneses is an effort in vain, and chances are, many of your flashy familiars aren't living as fun and fancy free as they'd have you believe. Not only do they have their own Joneses they're trying to keep up with, but odds are that many of them are also in debt. (See also: 4 Money Lessons You Can Learn From the Joneses)
When a marriage ends, it can be financially disastrous for both people. Divorce often means that each person is going from two combined incomes to one, and it's even worse for the person who earns less. One person may end up responsible for child support or alimony payments. A divorce might mean you have to sell a home or other assets at an inopportune time. Plus, there can be massive legal costs.
Sometimes divorce is necessary. But couples who are separating can reduce the financial impact by continuing to offer financial support for each other, if they are willing.
They can also keep legal costs low by keeping the divorce proceedings as amicable as possible, and by using a mediator or arbitrator instead of going through the court system. (See also: How to Protect Yourself Financially During a Divorce or Separation)
As many as 4 million people in the U.S. have a gambling disorder, according to industry groups. And Debt.org reports that 23 million people in the U.S. have gone into debt due to gambling, with an average loss of $55,000. If you have a gambling disorder — or even if you only gamble casually — you may be putting yourself at great financial risk.
There are a number of ways to tell if you have a gambling disorder. The American Psychiatric Association lists the following indicators: lying about gambling to friends and family; following up losses with immediate new bets; and turning to others for financial help due to gambling losses.
A gambling addiction is treatable through counseling, and even some medication. If you are finding yourself facing debt caused by gambling, seek help before your financial problems worsen.