Top 8 Reasons You Are In Debt

avoid debt trap

More often than not, we see red when we look at our bank account balance. If you are not managing your money well, you may be scratching your head as to how you ended up in this predicament.

Here are the top 8 reasons why you’re in debt!

1. Poor money management and overspending

Poor money management is often the root of all the other causes, and frivolous spending does not help your case.

Believe it or not, spending unnecessarily is one of the most common ways fall into the debt spiral.

How to avoid it: Don’t be too swipe-happy with your plastic card. If you tend to spend impulsively, leave your credit card at home when you go to a mall, or anywhere you get the chance to spend money.

2. Uncontrollable lifestyle inflation

Lifestyle inflation happens when we increase our spending as our income grows. When lifestyle inflation gets out of hand, it is very hard for one to go back.

This is all fine if your income continuously increases, but it can be crippling on your finances if your income is reduced, due to loss of job or even a demotion.

How to avoid it: Strive to live within your means, and set aside the same percentage of savings religiously. If you set a target of saving 20% of your income every month, you will be saving RM500 a month, and RM1,000 when you are earning RM5,000.

3. Medical expenses

Unfortunately, we have no control over unexpected accidents and sickness that may befall us anytime. We can prevent by living a healthy lifestyle, but sometimes, life can hit us in the gut when we least expect it. And you’ll be hit the hardest if you don’t have the right insurance coverage to cover it.

With the rising medical inflation at 12% a year, getting sick can hit one’s finances hard, and may even put us into debt if we do not plan our finances for emergencies.

How to avoid it: Our best bet is to get adequate insurance coverage to protect us financially if we are hit with an illness.

4. Student loan

Even before getting their first job, many of the fresh graduates have already found themselves saddled with debts, such as the PTPTN student loan.

However, if you manage your money well from the beginning, you can make sure your student loan stays as a good debt.

Neglecting your student loans could lead to dire consequences. Over time, you’ll find yourself taking in more financial obligation and commitments, and paying a student loan on top of them may just be the straw that breaks the camel’s back.

How to avoid it: Settle the student loan as soon as possible. Once you’ve cleared the student loan, you will be able to focus on growing your wealth.

5. Gambling and poor investments

We’ve all dreamed of achieving financial freedom and not needing to work anymore, but reality, in most cases, bites. However, most people still try to take the short cut of hitting it big by gambling recklessly and making risky investments.

Many inexperienced investors who’ve entered the market hastily often find themselves getting burned. One thing leads to another, and before they know it they’ve even put their properties at stake, or have incurred more debt in hopes of winning it back.

How to avoid it: Forget the myth of easy money. There’s no shortcut to this.

The more effort you put in learning how to invest and make money, the better chances that you’ll actually see the rewards of your effort.

6. Not saving money

Saving too little or not at all is a shortcut to debt. It only takes one unexpected event to flip your bank balance to the red.

Most people live from pay cheque to pay cheque, and their only way of indulging is by depending on their trusty little plastic card. Credit card should not be used to buy you things you cannot afford.

How to avoid it: The simplest way to avoid unwanted debt is to prepare for unexpected expenditures. The recommended savings you should have at all times is three to six months of your monthly income. This contingency fund will see you through a job layoff or even illness, so you will not be financially strained.

Read More: Why Should You Save 6 Months Worth Of Emergency Funds

7. Getting married

Getting married is probably one of the biggest financial expenses you’ll make in your life. The average cost of a wedding in Malaysia can be more than RM50,000. If you are not financially prepared for it, it can be your ticket to debt-town before the last guest leave.

How to avoid it: If you don’t have the luxury of having your parents paying for your wedding, it is best to start saving as soon as possible. By leaving it to the last minute (when you’ve met someone), you may not be able to save enough for the wedding.

8. Financial illiteracy

Not knowing how money works and grows can be bad for your finances. Having a good job with a stable income no longer leads you to wealth. You need to know how to make the most of the money earn through savings or investments.

Our education system does not teach us how to manage our money, and most of the time we pick up our money habit from our parents.

You are responsible for your money. Financial mistakes are increasingly expensive and complicated to resolve. Get educated and get in control.

How to avoid it: Read up as much as you can on how to manage your money. With the advent of the Internet, knowledge is literally on your finger tips. So, what’s stopping you from learning?

Sometimes getting in debt is unavoidable (like getting a home loan to buy your first property) but your debt does not have to turn bad. By planning and managing your money well, you can sidestep the debt pit without breaking a sweat.

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