Key Signs That You’re Falling Into Uncontrollable Debt

Key Signs That You’re Falling Into Uncontrollable Debt

Let’s face it, no one likes to be in debt. Being tied down to monthly payments and struggling to make ends meet isn’t our definition of an ideal life. Sadly though, it’s not uncommon for people to be buried in debt. Sometimes it can be due to an unforeseen expense, and other times, it can be due to a series of questionable financial decisions. There are plenty of reasons why people run into debt and for most of us, it can feel downright overwhelming.

But all hope is not lost. If you truly wish to live a debt-free life, you have to understand how you got there in the first place. Whether you’re looking to pay off your credit cards or aiming to stay out of debt, these cold-hard truths will serve as eye-openers and help you make smarter financial decisions. As we would always recommend, it is advisable to get in touch with a professional debt solutions company in Melbourne to ensure all your questions are answered correctly.

Collecting credit cards

Banks and credit unions are masters at creating enticing credit card offers, often throwing in free tickets or points if you spend X amount of dollars in the first three months. It sounds like a good deal, and it is — for the credit card companies at least. Unsuspecting cardholders may give in however and think they’ll just be able to pay off their balance soon. But in reality, that “soon” is way further than they might imagine.

That’s why creditors take their time to make eye-catching deals because they know that more than half of the cardholders lack enough discipline (or money) to fully pay off their balances after racking up the charges. Their balance freezes and the rewards end up costing you in the long run.

Also look out for credit cards with enticing ‘balance transfer’ offers, that allow you to transfer the balance of one credit card to another interest free for a specified number of months. While this low-cost, extra window of solvency may be tempting, it’s easy to forget about the often high interest rate that applies after the initial period, cumulating into further debt.

Lack of savings

Having enough savings at the back end is crucial for achieving financial freedom and coping with unexpected expenses. Most experts recommend saving at least 10% of your gross income each month. You can calculate this by finding out your yearly pay and divide it by 12 to get the monthly amount. These savings can be used for fulfilling both short-term and long-term goals such as saving up for retirement, buying a house, paying for your child’s education, and investments.

Aside from your savings, it’s important that you’re stashing money for an emergency fund as well. An emergency fund is larger compared to your savings and should theoretically cover your living expenses for at least 6 months. This means that if you survive with $5,000 monthly, then your goal should be to save $30,000. An emergency fund will help you rebound from a major financial shock like a job loss, a major car repair, or hospitalisation.

The last thing you want is to be slapped with a big expense without having the means to pay for it. This can lead to reverting to using your credit card and accruing interest charges, costing you more than what’s already a hefty sum of money.

Keeping up with the latest and greatest

Sometimes people get caught up in owning the latest and greatest pieces of tech like the newest iPhone or Android phone. After all, smartphones have become some sort of a status symbol in this modern world. But does upgrading your phone every year really matter when your current one is working just fine? Spending things that you don’t necessarily need is a one-way ticket to debt city and plenty of cardholders are guilty of doing this. Because the latest devices can get very expensive, some choose to split the whole cost into two credit cards, which again, can put you in a perilous position.

Failure to budget

At the end of the day, it all comes down to one simple thing; people spend more money than they make. It sounds simple, but most people aren’t keeping track of their income and expenses to avoid getting indebted in the first place. While sitting down with an Excel spreadsheet and working the numbers doesn’t sound exciting, it will help you set a limit for your budget and adjust your spending habits accordingly.

There will always be a temptation to spend money. Loans, emergency funds, credit cards, and savings allow you to buy more stuff that your monthly salary would allow. But if you’re prioritising your needs versus your wants, you will struggle to clear your debt. Living within your means is one of the many ways to steer clear of debt. Look for ways to diversify your income stream and explore several investment options so you can spend more in the future without having to resort to credit card debt.

Getting into debt robs you of the financial freedom you’re looking for and puts an enormous stress on your day-to-day life. By identifying the causes of debt, you’re much likely to make wiser financial choices and improve your overall financial standing.