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Debt Management Guide

Common causes of a debt crisis

The rule of thumb is simple: spend less than you earn. Sticking to that rule enables you to have the freedom to make personal decisions without the pressure of an out of control debt burden. However, an increasing number of people find themselves experiencing financial difficulties that involve uncontrollable sums of debt. Recognizing the causes of financial strain can be very helpful in avoiding it altogether.

More specifically, the following list includes the most frequent causes of debt:

1. Living and spending beyond your means. This is the single most important cause of financial strain. Saving a small percentage of your income can preempt a financial crisis and add flexibility in your current and future decisions. This becomes particularly important when an unplanned event causes a decrease in your monthly income while your expenses are inflexible.
2. Loss of a job or underemployment. Obviously, loosing a job or being underemployed for an extended period of time can cause significant pressure on your personal finances. Depending on your financial flexibility, it is advisable to save enough money to support your living expenses for a few months. In case of underemployment, adjusting your spending habits according to your income is a sound practice.
3. Medical expenses. Besides the emotional devastation, a medical crisis can be detrimental to your financial position as well. Avoiding credit cards and being extra careful with gaps in health coverage and lapsed policies can save you enough hassle.
4. Divorce. With over 50% divorce rate it is one of the most frequent reasons for debt. Legal fees, moving costs and increased living expenses can produce an unbearable bill.
5. Home or car expenses. Like all other, mostly unexpected and sizeable expenses, home and car related costs can ask excess financial pressure and increase your debt balance.
6. Poor money management. Most people lack an in-depth financial education and even become victims of fraudulent business practices. Oftentimes, financial mistakes are increasingly expensive and complicated to resolve. Everyone can benefit from receiving professional financial advice on debt and financial related issues along with keeping close track of all spending habits. A budgeting and financial plan process should be performed on a monthly basis placing increased emphasis on saving and credit strategies.

Following a set of simple advice can have a substantial difference in ones financial health. Consistently saving a portion of the monthly income, sticking to a financial plan and making sound use of good debt alleviate most of the financial risk incurred by our modern living pattern.

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