The reasons for an individual’s debts can vary greatly from poor financial management to expensive life events, such as having children. While it’s often not practical to avoid behaviour such as using credit cards, knowing the most common ways people get into debt can help you avoid doing the same thing yourself and allow you to stay clear of negative spending patterns.
Some people get into a position where debt write off isn’t possible which can result in serious financial and emotional pressure. Below are some of the most common ways people get into debt and how you can take steps to avoid them.
Poor financial management
Poor financial management is one of the leading causes of personal debt. With the cost of living set to rise in the UK by 5.4%, it’s become even more important to budget for monthly bills and expenses. Making a budget diary or using Excel to track and manage your finances can help outline areas where you’re spending the most money and channel this into necessary areas such as bills.
Areas with high cost of living
Living in an area with a high cost of living combined with a job with a low income can quickly send you spiralling into debt. This situation often means living payslip to payslip and any lost earning from your work can quickly result in you falling behind on necessary payments.
If you live in high-cost areas such as London, then you may want to consider simply relocating to cut your monthly costs. Asking for a transfer within your current job can help maintain your job security while also cutting your overall living expenses.
Over reliance on credit cards
At the end of 2019, the average interest rate on a credit card was 20.77%. An over reliance on these can quickly result in serious debt problems which only multiply as time passes. Before you consider even getting a credit card, you need to ensure that you can keep up with repayments. It may be best to reserve these for emergencies and in situations where you are certain you can pay back the debt.
No emergency savings
Having emergency savings can help you avoid credit cards and other quick fixes that result in further debt. Budgeting correctly and putting money aside can allow you to save for unforeseen expenses such as health issues and house fixtures. In the case of job loss, you may also be able to cover your expenses for a few months while you seek another job.
Business expenses
Those starting out on their own business venture generally take out an initial loan from a bank in the hope that they can pay this back in the future. This isn’t always the case and can result in significant financial trouble, as the business owner is responsible for paying back the start-up loan to the bank even if the business is unsuccessful.
Doing the necessary market research, budgeting and maybe even raising funds yourself is a good way to mitigate the risks involved with starting a business.
