You know how I dislike debt. Even "good" debt like a mortgage is something I recommend doing away with (and have done so in my own life). And in all the years I've been writing and teaching about debt, I've never seen a list of the top causes of debt -- until now. Here's Marketwatch's take on the top ten causes of debt:
1. Reduced income/same expenses.
2. Divorce.
3. Poor money management.
4. Underemployment.
5. Gambling.
6. Medical expenses.
7. Saving too little or not at all.
8. No money communication skills.
9. Banking on a windfall.
10. Financial illiteracy.
Ok, so some of these are pretty weak. But who's going to read an article titled "The Top Five Causes of Debt"? I can just hear some editor telling this writer, "People want top 10 lists! If you have to, make up some weak ones but be sure to have 10!!!!"
Enough of my rant on the financial media. Now back to our regularly scheduled commentary.
In my experience, the vast majority of debt is caused by overspending -- people simply spending more than they make (by charging/taking out loans) over and over and over again. I don't know if that's #3, #7, or isn't really covered here, but that's what I see as the reason for most of the debt people have today.
For some thoughts on spending less than you earn (which is a great way to stay out of debt), see these links:
- Rich Getting Richer, Faster
- Spend Too Much – or Earn Too Little?
- Financial Trade-off's Determine Whether or Not You'll be Rich
If you're in debt and want to get out, here are some links that might help you:
Some of the people who suddenly find themselves laid off or have their income reduced suddenly were really in trouble before the income reduction. They are in credit card debt, thinking that as long as they make payments they are ok. The people who do this tend to be those who want to belong to a class above them. They live the lifestyle of that class above them, using credit cards to maintain the lifestyle. Maybe they are really making a working class salary, and should be renting a modest apartment instead of buying a home. But they see others buying homes, they want one, and tell themselves it is normal to live with debt and payments. They are living a fantasy in which they are middle class, and as long as they have the trappings of middle class life, they keep deluding themselves. Maybe they really can't afford a nice car, but really should have an old beater instead. But they see other nice cars in the parking lot at work, and they want to have one too. They really can't afford a vacation to Hawaii, they really should just use their time off to do something cheap and local. But that wouldn't fit in with the middle class fantasy. Same with DVD players, upgraded computer, those hardwood floors, soccer lessons for the kids, nice dinners out with cocktails. Biggest cause of debt is not accepting one's true financial situation.
Posted by: erb | March 09, 2008 at 05:46 PM