When Debt Spirals out of Control…

by Adam on July 6, 2017

cautionDebt is something that no one wants to experience, yet the reality is that most of us will at some point. Not all debt is bad either: consider a student loan as a prime example. But, having full control of your debt and managing it effectively is important. This all begins with educating yourself, which is why we put this post together. Below, we will take a look at the key signs that your debt is spiraling out of control, as well as providing a number of reasons for this happening. Hopefully, it will give you the knowledge you need to avoid such a scenario occurring.

Warning signs that your debt is spiraling out of control:

  • You have become depressed or extremely stressed Worrying about money from time-to-time is normal, but if you are always in fear of creditors hounding you, this is a clear sign that things have gone too far. If you are not able to function or eat properly, you keep arguing with your partner over finances, or you are ignoring collection phone calls, you need to face up to the fact that you have lost control over money matters.
  • You are spending more than you can afford – If you are not conscious of your debt-to-income ratio and you don’t budget, it is very easy to overextend yourself. Work out how much incomings and outgoings you have per month. If you are spending more than what you have, it is time for change.
  • Your debt is always on the increase – If the amount of money that you owe keeps increasing every month, not only due to added purchases, but also because of interest and late payment charges, you are definitely heading down the wrong path. You need to ensure your debts are only getting smaller and smaller every month to stabilize your expenses.
  • You use your credit card to pay for everything – Do you find yourself using your credit card to pay for everything from your bills, to fuel, to food? If so, this indicates you are living way beyond your means.
  • You are only meeting the minimum payment amount on money owed – Of course, if you can’t even pay the minimum, then you definitely have to face up to the issue of debt. Moreover, paying the lowest amount possible every month enables the creditor to charge penalties and interest fees. It can take years to pay off your debt when this starts to happen. Plus, you can end up paying double the amount of your initial debt due to the interest accrued becoming so high.
  • You don’t know how much you owe – This is one of the clear signs that debt is a problem that needs to be addressed. Financially savvy people always know how much money they owe, and they make certain that they budget their expenses so that they have enough money available. If you do not keep track of what you spend and you have no idea what your current balance is, you could be in for a nasty surprise.

What are the main causes of debt?

There are many reasons why people end up in debt, and in some circumstances it is unavoidable. However, there are many cases whereby debt could have been prevented. Let’s take a look in further detail:

Underemployment

Underemployment can feel like a relief to those that have been without a job for a while. Or, if your hours have been cut, it can feel like it is just a temporary situation. When it lasts longer than anticipated, it eats into the money you do have, as you aren’t bringing as much in.

Poor money management

There is no denying that one of the main reasons people end up in a cycle of debt is because they do not manage their money effectively. It is important to put together a monthly spending plan. Without one, you will not have any idea where your money is going. You could be spending hundreds of pounds each month unnecessarily. All you need to do is write down your income and your expenses and reconcile the two – it really is that simple. It will give you greater clarity over what you have, enabling you to make sensible decisions with your money.

Borrowing money irresponsibly

It is very risky to borrow money without conducting the necessary research or ensuring the terms are right for your situation. Most people will take advantage of a loan at some point in their life. This can be a great way to move up the property ladder or to help you get out of a sticky situation. However, you do need to ensure the loan is right for you and that you can make the repayments. Payday loans provided by the likes of Payday Loans Net are short-term loans of a small amount. They are designed to help you deal with those immediate tricky financial situations, for example, an unexpected car repair bill. There is no point in taking out a large bank loan for such a scenario. Don’t borrow more than you need and ensure the terms are favourable in regards to your situation.

divorce split moneyDivorce

Anyone with experience will know that divorce is one of the most expensive things you can go through. Unfortunately, in some cases, an expense divorce is unavoidable, especially if your ex-partner is being difficult.

Reduced income/same expenses

Many people end up with a debt gap once their income has been reduced. No matter whether you are on unpaid leave or you have had your hours reduced, it is important to bring your expenses in line with your earnings, no matter whether it is a temporary or permanent scenario.

Financial illiteracy

A lot of people do not understand how money works. They don’t know how to invest and save for a rainy day. They don’t know why it is important to balance their cheque book. Why should they? No one has ever told them before! Schools don’t often teach the ins and outs of managing your own money. One of the best ways to gain control of your finances is to get educated.

Spending tomorrow’s money today

Banking on a windfall is very, very risky. What if tomorrow’s money never comes? Then, what will you do? Don’t spend the money until it is cleared and in your bank.

british pound notesA lack of communication

If your finances are linked to someone else, i.e. a partner or the rest of your family, communication is imperative. Debt can easily arise when there are no lines of communication and people do not discuss spending styles and financial goals. In most marriages, there is one spender and one saver. If you are the latter, you need to map out a strategy for both of you to use so that you can get what you want.

Not saving enough

Having an emergency fund for a rainy day is of vital importance. One of the best ways to protect yourself from debt is to prepare for unexpected expenditures. You should try to save up between six and three months of living expenses. This will give you a good cushion should something go wrong.

Medical expenses

Last but not least, another reason for debt is medical expenses. Of course, we are lucky enough to have the NHS in the UK. However, a lot of people find themselves in debt when they fall ill abroad because they have not taken out the necessary insurance. Travel and/or medical insurance is so important, and you need to check the coverage to ensure it is right for you, offering the best degree of protection.

 

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