Friday, April 6, 2007

The Top 10 Causes of Debt


As I was cruising around the internet looking for ways to help you be frugal and save money, I ran across a list that I had never seen before. It was a Top 10 list for the Causes of Debt. Not only did I see this list once, but it popped up on three different financial sites that I routinely track. Wow! I quickly scanned the list and frowned.

I could agree with some of the points of the list, but overall, I have seen variations in my data that don’t support the reasons why my clients are in debt relative to the list created by http://www.marketwatch.com/ . Before I launch into my rebuttal of this list let’s take a look at what Marketwatch came up with for 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

What I find amazing with this list is that the reason most of my clients have debt is due to one thing and one thing only. They spend more money then they earn. I know this may sound stupidly simplistic, but it is true. I have found in counseling over 362 families on their personal finances that the main cause of debt was due to their banking on money they didn’t have. Financial decisions were being made without a clear understanding of how much money they actually had coming in the door!

That’s right! Of the people I have coached, 98% of them could not give me a clear dollar figure of their earnings. I was blown away! Now, when I say how much money you earn, I mean the amount of money you have left after Uncle Sam takes his slice of your paycheck. It was amazing how many folks had to call me back or had to refigure their income. Upon figuring their income after taxes they were dumbfounded at the amount they had left. Just because you have a job that pays you $56,000 a year doesn’t mean that is the amount of money you have to “play” with. However, most of my clients have the $56,000 number in their head and they spend money like that amount is in their checking account!

I recommend that if you don’t know your exact income after taxes and other deductions that you have removed from your check, go figure it out now. Determine how much you get from every paycheck to SPEND. Then figure out what that adds up to for a year. This number will shock you into a new realization that you are not as “flush” as you thought you were. This simple exercise was enough to make many of my clients back pedal on major purchases they were planning. It put them in a whole new mind set regarding their income.

The biggest thing to remember with the causes of debt is not what other people think about and say is your financial situation, but what you think about your personal situation. The best way to pull yourself out of debt is to first get a clear understanding of your income then go from there. Most folks don’t take the time to really know their money in detail. This is why debt creeps up on them and before they know it they have spent themselves into a $9,000 credit card bill. (Read the rest of the story)

3 comments:

amsrn said...

With regard to medical expenses, for a family that does not incur regular expenses, what is the best way to insure? Employer offered insurance? Independent policy?

Janine Bolon said...

This is a question that only you can answer. The needs of each family are different. You know those needs better than anyone. My husband and I lived for three years without any family health insurance because we were researching not only the different options, but we had also become self-employed and were looking for coverage that wasn't ridiculously priced.

Emma Bryn-Jones said...

Totally agree with you and there is a fear of fessing up that we don't know income : expenditure. The credit industry thrives on that, as do many financial pundits who claim budgeting is easy. It isn't when you feel stupid and scared.