Understanding Debt Compulsion

In this spend-first, plan-later society, it's easy to slip into debt. Knowing the reasons why people head down that slippery slope could help you avoid a similar fate.

If you had a dollar for all the different reasons that people go into debt, you'd be rich. Consumers find countless ways to spend their hard-earned cash. Unfortunately, it's not as easy to dig yourself out of the hole once you've stumbled into it. Knowing the root causes of debt will give you an idea of what to avoid in the future.

Expenses higher than income

This common problem among poor money managers is quite simple: You spend more than you earn. This simple problem has an equally simple answer: Either find a way to generate more income, or reduce spending. One way to create more money is to get a better paying job; another is to open your own business and make more than your current job pays. Another is to hit it rich in stocks or real estate. You could score a lucky lottery ticket, but the odds of winning are too ridiculous to even consider such an option. A more realistic method is to create a budget, track your spending, and then reduce expenditures.

Visit from the unexpected

Some of the root causes of debt are linked to life events that may be out of your control. Divorce is a huge income pincher. Beyond the splitting of assets, there are often legal bills to pay, and other unanticipated expenses. Beyond that, two always live more cheaply in one household than in two. A job loss also puts major constraints on your cash flow. Medical expenses, like uninsured costs from a disabling accident, can also be a huge cause of financial difficulty.

While these events are difficult to anticipate, you can take steps to avoid the shock. Pursuing marriage counseling may help avoid a costly and emotionally painful divorce. Anticipating future layoffs, and training yourself for new occupations, can help with possible unemployment. Purchasing short-term disability insurance, or good health insurance, can also help.

Not understanding money

The less people understand how money works, the more likely they are to fall into debt. Credit cards are a perfect example of how destructive financial illiteracy can be. If you don't understand the danger behind paying only a minimum balance on your credit card debt, for example, or you're unaware of the benefits of a debt consolidation loan, your overall finances will suffer.

Hoping for the big payoff

Another cardinal sin of money management is counting on a financial windfall. Betting on the future can have a disastrous effect on your present-day life, especially if you overlook your current finances. Dream about the future, but live your life in the present.

Knowing the reasons why people slip into debt can be a method for avoiding financial trouble. If you exhibit the characteristics listed above, put on the brakes and reevaluate your financial situation. It's the only way to avoid debt's slippery slope.