Causes of debt – and what to do about them

Are you in danger of having your dreams for the future grounded by debt?

Consider this quick checklist. Do you:

• Pay only minimums on credit cards, or miss payments?
• Obtain a new credit card when others are at the limit?
• Resort to a high-interest lender to cover your other bills?
• Depend on moonlighting or overtime to cover your expenses?
• Find it impossible to save money?
• Panic when unexpected expenses strike, such as car repair bills?
• Base too many spending decisions on “wants” and not “needs”?

If any of the points on this list describe you, there might be a debt problem in your near future.

Of course, being in debt is not always bad. Many people spend 25 years in debt – and that can be a good thing if it’s a mortgage and you are in the early years of your working life. Home ownership is widely touted as a good investment, and very few people have enough savings to purchase  a house for cash, so they need to borrow.

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However, many people gradually work themselves into the ground through simply spending more than they earn. This is evidenced by recent statistics showing that the average Canadian has $1.68 of debt for every $1.00 of disposable income.

Sometimes, the high debt load occurs through having a too-luxurious lifestyle – dining out too frequently, taking lavish vacations, purchasing designer clothes and having a spending pattern that can be characterized as “trying to keep up with the Jones’s.”

Over-spending often gets a boost through credit abuse, particularly credit cards. This can happen:

• Because of what seems to be “free money” through the credit card, you buy more than you otherwise would if you had to watch the cash actually disappearing from your wallet with each purchase;
• As a result of being seduced by credit card issuers to activate and use a new credit card with a reward feature;

• Because you do not or cannot  pay off the total amount each month;

• Because the interest charges on the amount you owe from month to month erode your ability to repay what you owe.

To stop the credit card monster from eating your future, you’re best to pay off the whole balance each month. For some people, it’s also wise to make a rule that credit cards are only for emergencies – and if you can eat it, drink it or wear it, it’s not an emergency.

You may have heard the phrase “Pay yourself first” from personal financial planners in assessing an individual’s financial affairs. This approach to your budgeting can be critical to a sound financial plan and to avoid incurring debt to unexpected events. A good rule of thumb is to put aside ten percent of your earnings as a safety cushion and set a goal to have at least three months wages saved for unexpected events in your life such as a layoff, a roof that needs replacing or a major car repair. You’ll have the peace of mind of knowing that if you have an emergency arise, you won’t have more debt to add to your worries.

While debt is never a good thing, if obtained wisely and managed properly you can maintain control of your future and not have it grounded by debt.