How Do People Get Into Debt?

Have you ever wondered how and why people get into debt? Financial stability remains a pervasive problem for many in the United States, in spite of it being among the wealthiest countries in the world. Financial pressure can come from any number of directions, and some are unavoidable. For example, data suggests that three in ten Americans report trouble paying non-negotiable medical costs, with many cutting back on food or basic household items to compensate.

Some frightening numbers of the U.S. consumer debt figures from 2019, from nerdwallet.com:

Getting out from under the shadow of debt can seem like an insurmountable task, but with a little planning and diligence, it’s entirely possible to reclaim your financial freedom once again. While certain costs and setbacks simply cannot be avoided, there are a number of strategies you can employ that will stack the cards in your favor.

This article will explain the reasons people fail to accumulate wealth and reach financial stability in a meaningful way and what can be done to remedy the situation.

Why Do People Get Into Debt?

There are several reasons why people accumulate debt, like paying for unforeseen emergencies or unemployment. But most often, debt is a result of bad spending habits, not living below your means, not investing money, and not building income streams.

We will dive more into some of these reasons and see any of them sound like you and take note on ways to fix it.

1. You Aren't Living Below Your Means

Of course, it can be tempting to drive a nice car and live in a nice house or fancy apartments, but if the amount of money you are making fails to justify these expenses, it’s better that you swallow this bitter pill of reality sooner rather than later. Don’t let your ego prevent you from doing what makes sense of living below your means.

Instead of having a nice car with lease payments every month, downgrade to a used car and buy it outright. This will pay off in the long run as you don’t need to keep shelling out cash every month to use something that isn’t even yours.

Depending on your situation, the same may apply in regard to buying a house versus renting. You generally never see the money you spend on rent again, so if you can confidently buy real estate, at least you get a return on your investment. Even though homeownership among younger generations remains low, mortgage rates are often the more economical choice if your circumstances allow for it.

2. You Don’t Invest Your Money

It’s important to always have the long-term in mind when handling your finances. Polls show that only 37% of people younger than 35 have stocks, which means a huge loss for opportunities at future wealth. The idea of putting away money in stocks can seem overwhelming or otherwise unappealing since they see no short-term benefit. However, it’s often said that time is an investor’s greatest asset, which means young people have the most to benefit from funneling some income in the stock market using easy to use investing apps.

3. You Don’t Take Advantage of Other Sources Of Income

If you can use your leisure time to combine something that you like with a money-making opportunity, your bank account will start to take a turn for the better. Did you know that your hobbies can make you money? If you have a hobby like graphic design, coding, or painting, this type of freelance work can ease the pressure to make ends meet each month.

If you become proficient enough at this side-job and enjoy it enough, it’s entirely possible to allow it to grow and overtake your primary source of income. You are more likely to do your best work and thus generate more wealth if you actually enjoy what you do, so don’t consider making a living off your hobby an impossibility.

4. You Spend Your Time Ineffectively

If you are working a dead-end job or doing something that fails to inspire you, you should have a plan for how you want that to change. Spend your leisure time investing in yourself and increasing your value in the world. Consider furthering your education in your downtime by taking a few classes. Your level of education is positively correlated with wealth, so there is long-term relevance in this self-investment.

5. You are Unwilling to Sacrifice

Do you eat out every week or go shopping too much? Do you not want to give up cable? Becoming debt-free starts by paying less on your monthly expenses in order to free up cash to pay down those debts. Your lifestyle might need a change if you aren't finding new ways to save on a daily basis. What are you willing to give up?

6. You’ve Fallen Victim to Credit Cards

Credit card debt is among the absolute worst kinds due to the astronomical interest rates charged and is one of the most common reasons individuals are forced to hire bankruptcy lawyers. It’s important to remember to check your balance frequently so you can fully understand that this is not “free money”. Often times, the speed and convenience with which you can pay for something on a credit card results in people overstepping their financial boundaries.

You should only pay for items with your credit card if the amount can be paid off in full each month. If you can consistently pay your balance completely and on time, you won’t have to keep wondering what the impending financial consequences that inevitably await you are.

7. The Growth Of Debt Recovery Services

While most of the world has recovered from the effects of the 2007/2008 global financial meltdown, the economy, both locally and on a global scale, has been a bit sluggish. More people are unemployed due to COVID-19, while those that are employed might be working for a fraction of what might have been considered a fair wage within a thriving economy.

This not only makes people more aggressive in terms of getting debt, but it has also made defaulting more common. More and more companies require professional help to recover debt from their clients, and where there is increased demand, you are bound to see an increase in suppliers. Therefore, there are more debt collection agencies, since there are more debt defaulters due to the economy.

According to an extensive research paper published by the Australian Competition and Consumer Commission (ACCC) in 2015, the debt collection industry was growing at a very fast rate, with projections stating that the growth rate was bound to increase in the coming years. As of 2015, the industry was growing at a rate of 8.4% every year with revenues exceeding the $1.2 Billion mark and more than 570 registered debt collection agencies operating within the country.

Such impressive growth figures and projections must-have factors that are positively influencing them. One of the industries that have grown in tandem with the debt collectors has been the credit reporting sector. These are financial services that collect the credit details of delinquent debtors, which are then used by other credit-offering organizations. These details help to verify the dependability of someone who is about to receive a loan or a line of credit. With people being aware that their past behavior with creditors can affect the chances of them getting any future credit, they are more likely to comply with debt collecting agencies that have contacted them regarding outstanding debts.

The Bottom Line

So are you ready to make life changes or have you learned the reasons behind how do people get into debt?

It's all about making the right decisions to get out of debt and make positive choices on a daily basis.

Take charge of your finances even if you are living paycheck to paycheck — it's possible.