Mistakes That Keep People in Debt
I have certainly made my share of financial mistakes from running up credit card debt to spending student loan money on an iguana, but I think after all those mistakes, I’ve finally learned how to stay out of debt. However, I see people every day who are still struggling with the same money problems we used to. There are some key mistakes that can sneak upon anyone trying to beat the cycle of debt.
Taking Out Loans After Paying Off Large Amounts of Debt
We knew another family that were going through some of the issues we were during our massive credit card debt payoff. We used to all hang out and play musical credit cards, charging whatever and whenever we liked. Jim and I had our wake up call after seeing family really struggle after losing a house to foreclosure. Our friends lost a job during the great recession. The husband worked in a sales job while the wife stayed home with the kids. Since they had no emergency fund, things got pretty tight. Eventually, they made some tough decisions, which included selling a really nice house that was keeping them house poor. They moved into a small rental. The wife took a job. The husband found a more stable job that he didn’t like as much, but they were able to pay off debt and get back on track financially. Until they bought a new car. Never mind that they had two paid off vehicles that ran just fine. They wanted a new car, and convinced themselves that taking out a car loan was a good idea. Now they are back into the monthly payment game.
I’m not picking on my friends. Jim and I paid off our credit cards a couple of times over the years only to run them back up again. Until you get to the point of knowing that monthly payments for consumer debt do not have to be your life, you are at a huge risk for falling back into debt.
Not Having an Emergency Fund
Even with the new car purchase, our friends seemed to be doing well. Last year, they were able to buy a house better suited to their income. Home ownership is the American dream after all, but then the husband quit his steady job to go back into sales. The sad thing is that this family still does not have enough in savings to make it through one month of expenses. The wife is still working, but her salary is a fraction of what the husband makes.
I think life is too short to work in a job that you hate, however, you can’t just jump ship when the mood hits. If he wants to make a career in sales, I think that’s a great plan, but he should have remembered what happened the last time the economy went south. Now there is a new house payment, a new car payment, and a paycheck that is not dependable. I can only hope things go better on the job front this time. Even if it takes a long time to save up, I think you need at least six months of living expenses in the bank before you leave a steady job for the unknown. Being able to borrow from your retirement plan does not count. That’s certainly not the YOLO philosophy, but not being able to pay your bills is not the kind of exciting I’m looking for.
Going Back To School Without Knowing If It Will Help Job Prospects
I had a patient not too long ago who lost a job in social work. She decided to go back to school to get a master’s thinking she’d have a better chance at a higher paying job. She got the degree online, which was convenient, but very expensive. Now she has a master’s in social work, no job, and a sack of student loans. It’s amazing the things people tell you during an eye appointment!
Furthering your education can be great way to move up the career ladder, but you need to know that it will be a help in your profession before you take out student loans. In this lady’s case, even with a master’s in social work, the top salary does not warrant what she spent on an expensive degree. Taking classes at a state school might have meant driving and time away from home, but it would have saved thousands of dollars. It also hurts that we live in a small town with limited job openings. If you know you don’t want to move for work, then find something that you can do in your area.
These are three of the mistakes I’ve seen personally that keep people in debt. I’m certainly not perfect, but I’ve learned that having savings and not allowing ourselves to buy something we can’t pay for right away is what is going to keep us out of debt forever. It only took a decade to realize this, so hopefully you’ll take my advice to avoid your own mistakes.
What debt mistakes do you see people making every day? Would you stay in a job you hated to pay the bills?
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Honestly, failing to track expenses is another reason people go broke. Using a tool such as Mint or Check, which track all money coming in and out, is huge. So many people I know make a million trips to the drive through or get coffees every day at Dunkin Donuts and wonder where their money went. Once they track it, they see it’s all the little stuff that adds up in the long run.
I have seen the going back to school one too many times. People automatically think that if they go back to school, they will be making a lot more money. That is rarely the case and only depends on the field.
I had a fellow advisor who worked with a family to clear up a ton of debt by refinancing their house and rolling the debt into a low cost mortgage (and tax deductible…..). What did they do with the money? While my friend made it clear that the money they’d saved (well over $1,500 a month) was to be saved, they used much of that cash to finance two new cars and a boat. Now they had a HUGE mortgage payment and three new payments.
They were shocked when he refunded their planning fee and asked them to go away.
If I’m totally honest I’m in a job I hate right now. Crazy, eh?
So why haven’t I quit yet? Quite simply because I’m using my job as a tool. A way to generate a nest egg for future investment.
It’s stressful, boring, tiring and all manner of other things – but it’s the best paid job I’ve ever had by quite some margin.
I’m not planning to stick with it too much longer (because it’d probably kill me 😉 but for now I’m buckling down and sticking with it – and putting as much into savings as I can.
In essence I see it as short term pain for long term gain.
Well for me, not taking emergency fund is one of the debt mistake that keep people in debt that I’ve observed. Emergency funds is very helpful especially in times that we are needy also to avoid possible debt.
Oh man I see people going back to school without any plan all the time. It makes no sense and I always try to push back a tiny bit just to question if they have really thought it through or not.
I think it’s hard when someone has made up their mind. You can convince yourself that just about anything is a good idea if you want.
I would stay at a job I disliked to make ends meet but I would also try finding another one. I’m guilty of always wanting to go back to school but I enjoy learning. I only pick up a course here and there if I have the extra money.
I’m all for education if you aren’t going into debt for something that might not have a return on investment.
Paying your bills ALWAYS trumps not liking your job. If you can find a job you like better that will pay the bills, great, go for it. I have watched people quit their jobs because they had “Had it, and just couldn’t take it anymore.” My first question was always, “So, where are you working now?” The answer was silence…..duh, don’t quit one job until you have another one!!!
Right! Not being able to pay the bills has to be much more stressful than any job, especially if you have a family.
I never realized how talkative clients were during eye appointments! They must figure you’re cheaper than hiring a therapist. LOL! Yes, so many people get in and out debt multiple times in their lifetimes. Some, honestly and sadly, never break the cycle. And others do. It maybe they got scared straight or just woke-up one day and realized this was no way to live. I know I say this all the time but in so many instances it comes down to a lack of clear goals. They don’t know what they TRULY want, so they chase after everything. They follow the herd and create debt over things they ultimately care little about. They just don’t know that yet because they haven’t taken the time to figure out what truly matters to them.
Shannon, those are such good points. I think for Jim and I, it wasn’t what we’d do the minute we paid off debt, but what did we want the next few decaded to look like and what did we want to teach our child about money. Before we did that, debt free lasted a few months until the next thing we wanted came along. Now, I know that most things don’t make you happy, but seeing our net worth continue to grow really does.
You touched on lost income and related that to the most common assumption: someone losing their job. That does happen. But people also get sick or hurt. People in debt need disability insurance, because a drop in income topples the house of cards. It is a hidden cost of carrying debt.
Absolutely. You are so much more likely to lose job income from disability than from getting let go for financial reasons. Loss of one or two paychecks can kill a family in debt.