When it comes to our finances, we desire a stable income with no outstanding loans. After all, having overwhelming debts can affect one’s mental health and constitute bankruptcy.
If you are struggling with expenses and find yourself in debt, observing the causes behind them and understanding how to overcome them is essential. Here are 8 common reasons why people go into debt and how to get out of it:
1. Poor money management
Do you see yourself succumbing to your impulses frequently? This shows that there is no clear distinction between wants and needs.
Needs are considered to be your life essentials (eg. housing and food) while wants are the things you desire which can be unnecessary (eg. branded goods). Prioritise settling your needs first before deciding to splurge on your wants. Should you require professional advice on overwhelming loans, seek debt consultancy to assess your situation and act accordingly.
Moving forward, cultivate this savings habit to reach your financial goals:
Save first, spend later
- Set aside some savings at the beginning of the month (at least 10% of the income as savings)
- Pay your necessary expenditures (eg. utility bills) and lifestyle expenses (eg. phone bills)
- Track your other expenditures to ensure proper budget management
Ideally, these savings should be placed into a separate account as a safety net.
2. Reduced income
Under volatile market conditions, companies may consider cutting costs by reducing their team size across departments. This places individuals in a tight position as their livelihoods get disrupted and uprooted.
So what should you do if you find yourself in this predicament?
- Standby an emergency fund that consists of three to six months of your previous drawn salary.
- Continue to clear your debts even when retrenched or unemployed to avoid interest rolls. If you are unable to afford your overdue credit card bills, you may want to apply for a debt consolidation plan that merges your existing balances from other banks into a single low-interest loan under one bank.
3. Financial emergencies
Due to unforeseen circumstances like car accidents and lawsuits, you may be digging deeper into your savings. These financial emergencies usually come at a hefty price and require you to pay in one full lump sum. Hence, it is crucial to budget your expenditure and build enough funds for your rainy days.
Like all addictions, gambling gets you hooked into thinking that the next big win is within your reach. You may be willing to loan from any financial resources, be it credit cards or even asking loved ones without considering the consequences.
If you see yourself in active gambling addiction or are at risk of relapsing, here are some tips for recovery from gambling debt:
- Create a financial plan that focuses on your immediate needs like housing and transportation. Ensure your spending stays within your budget by looking out for debt consultancy services that can review and advise accordingly.
- Limit access to money by setting a low cap on cards so that money cannot be withdrawn once it has reached the limit.
5. Business troubles
Struggling to maintain a failing business can be hard to come to terms with. It may be due to faulty business models or unsuccessful marketing campaigns.
However, there are still possible steps to take when faced with this financial crisis:
- Update your creditors on your financial situation and establish open communication. Work together with the bank and creditors to formulate a debt repayment plan that allows you to pay a fixed viable amount every month.
- Convey the message to the board of directors. If you portray yourself as a confident leader who is willing to take responsibility for the company, key personnel may still follow you through these tough times.
6. Fallen prey to scammers
Don’t be a victim of debt! In recent years, scamming cases have been on the rise, varying from job to phishing and investment fraud. Scammers are notorious for conning victims into transferring more fees as a promise to release their previous funds.
Be wary of their tactics - always remember to check if they are legitimate sources. If you have fallen for a scam, freeze your accounts, cancel your cards and e-wallets and report it to the police immediately.
7. A Guarantor to the main borrower who doesn't service repayments
Being someone’s guarantor means bearing the responsibility of paying off a borrower’s loan if they are unable to afford it. Individuals who take on the role as guarantors typically want to support someone who is on a lower income spectrum or is just starting out their career path.
However, it can lead to an enormous amount of debt should the borrower evade repayments. Hence, it would be wise to evaluate loan documentations and credit reports before proceeding to be a guarantor.
8. Large medical bills
Medical expenses can be costly, resulting in a struggle to stay afloat financially. This brings about the importance of having health insurance to cover your hospitalisation fees (depending on its coverage). If insurance is still not enough to cope with the debt, approach debt consultancy providers for their guidance in managing medical loans.
There is no shame in asking for help, especially when it comes to financial debts. We hope that these common reasons help you realise the importance of budgeting your savings and monthly expenditure. Be sure to leave some emergency funds for any unexpected circumstances. Book an appointment for a private no-obligation consultation today!