One of the biggest fears that you’ll face in your adult life is of debt. Forget about losing your job or having a failed marriage. This is the terror that keeps most people up at night. They worry about money. Am I spending too much of it? Will we get through the month on the amount that we have left in the bank. You might be surprised by just how many people deal with stress every day due to trouble with money. Even those who you might think have more than enough panic about their finances. That’s because they’re scared of falling into the debt trap. When you think about it, that’s exactly what debt is. A trap that you won’t be able to escape. It’s like falling into a deep hole with no way out. You can try and climb, but it will be a near endless struggle. That’s why you want to avoid that trap altogether.
You might think that it’s easy to avoid the debt trap. Only people who don’t know how to deal with their finances fall into it, right? Wrong, there are plenty of people right now who thought they would never be in debt but are struggling with money issues. Lots of circumstances can push you into a situation where you could be facing debt. On this post we’re going to look at some of the main causes of debt, and how to deal with them, so you don’t fall into it yourself.
Table of Contents
Money Pits And Bad Investments
One of the easiest ways to fall into debt is by taking on a bad investment decision. You might have been quite well off with a good amount of money in your accounts. But as soon as you make a bad financial decision like this, you’ll find your accounts quickly drain. The money you once had is gone, taken by that investment that you have to pay off. Let’s look at an example of this to better understand the risk.
You might have heard that investing in property is a great idea. It’s one way to keep your money safe and secure. As well as that, you might have heard you can double your investment in a matter of months. While this might be true, most people do this either by flipping the property or leasing it out. Both have huge hurdles that you will need to overcome to find success. We’re going to focus on property flipping.
The main idea behind property flipping is to find a fixer upper and fix it up. For a property like this to be a strong financial investment it needs to meet two goals. It needs to be cheap on the market, and it needs to be easy to fix. You should not have to spend a fortune on repairs and renovation. By doing this, you’ll probably find yourself taking out bigger loans to pay for it. Eventually, you’ll bleed your own funds try on an investment that wasn’t worth it.
That’s why before you make this type of investment you should be careful. You need to make sure that it’s a solid purchase. If you’re investing in property, always check that you have more in funds than you need. Think about the costs of renovation. You don’t want to be in a position where you need to borrow a lot of money to get through it.
Of course, property investment isn’t the only money pit that you might face. It’s entirely possible that you make a bad investment on the stock market. You might buy a lot of stock in what you think is a sure thing. But that stock quickly loses value before you can sell it off. At that point, you have lost all the money that you put into it.
To find out what is a good and bad investment, it’s best to use a broker. Most people make the mistake of thinking that investing is easy and they can do it without any advice or expertise. This just isn’t the case. In many situations, if you don’t know anything about investments you are going to end up losing money. That’s a fact and it’s a huge cause of debt in the modern industry.
Loan Misunderstandings And Improper Use
It’s true to say that many people fall into debt because they don’t understand the terms and conditions of a loan. In some cases, they just don’t understand that they’re even taking out a loan. The first thing you need to know about a loan is that you are expected to pay it back as soon as you can. That might sound like common sense. But it isn’t. This is where most people get the wrong idea.
A good example of this is the use of credit cards and credit in general. When a large number of people start living off credit, the economy can end up in dire straits as well as their personal financial situation. It’s understandable why people choose to live on credit. If you see people living a better quality of life you’ll think why can’t I have that? Suddenly you reach into your pocket and find that little card. A card that will allow you to buy anything you like with no consequences. Ah but there are consequences because eventually they will come to collect. If you can’t afford to pay, you’re in debt. They’ll take everything away until you’ve paid back what you owe.
Don’t forget, unless you have an interest free credit card, you’ll be paying interest as well. That means you’ll probably owe a lot more than what you borrowed. If you can’t afford to pay back what you borrow with interest, don’t borrow it in the first place.
As well as this, you need to be aware of short term loans. Short term loans are not intended to be used to borrow vast amounts of money. Rather, online payday loans are for people who need a little cash to tide them over until the end of the month. If you’re doing this, you’ll easily be able to pay the money that you owe back. However, if you’re taking out a large amount you’ll struggle due to the high interest.
Despite this, it’s still not always a bad idea to borrow money. On occasion, you can borrow money to ease off your debts. If you owe money from one source, and you can borrow more from another with a lower interest rate it makes sense to make the switch.
Redundancy And Poor Savings
Perhaps the greatest cause of debt is redundancy. If you’re made redundant, you’re going to struggle to get by. Typically, you’ll get a pay package designed to hold you over until you find another job. But this isn’t always enough, especially when you’re trying to stay afloat in a competitive economy. In this situation, there aren’t enough jobs to go around. That pay package that you thought you could rely on is going to run out, fast.
Perhaps the best way to deal with redundancy is to plan for it before it ever happens. You can do this by saving a lot more than you need. You should try to save a good portion of your paycheck each month. Ideally, you want to put away as much as you possibly can. Essentially, you need to plan for the worst and would definitely be a job loss. Aim to have enough in your account to keep you out of debt for six months. Again, this is the worst scenario. We imagine you’ll find a new job in at most two months. But by having enough money for six, you’re keeping all your bases covered.
If you are made redundant, you will have to take job seekers allowance. Job seekers allowance is not a loan. It’s something that the government will pay for as a benefit to keep you employed. However, they will only do this if you are continually looking for a new source of income. You must also accept any job offer that comes your way, within reason. Otherwise, they will stop paying this benefit.
As well as this, it’s a good idea to know how you can make other forms of payment during a period of redundancy. For instance, it is possible to make money online. By making money online, you’ll be able to pay off some of the bills before the build into debt. You might even be able to set it up as a temporary source of income.
Finally, you need to plan a budget. Planning a budget is the best way to stop yourself from going into debt. Rather than overspending, you’ll only be paying for the things that you need. You’ll keep your finances healthy and ensure you don’t owe more than you can afford. Planning a budget isn’t hard. You just need to sit down for a few hours, working out all your expenses. You’ll then be able to create a plan that you can follow.
These are the main ways you could fall into the debt trap. By knowing how to deal with these situations, you’ll be able to avoid it completely.
Image credit:
Image 1 – Chris Potter – https://flic.kr/p/dxpt8u
Image 2 – Mark Moz – https://flic.kr/p/hs9NDW
Image 3 – Chris Potter – https://flic.kr/p/dwM4xi
Image 4 – pixabay.com
