Debt can be caused by a variety of factors, when you spend more than you can afford. Some of these circumstances are just a result of everyday life and situations that many people encounter.
However, by keeping a close eye on your finances and managing your money effectively, you can better position yourself for when such events occur. Of course, other causes of debt may be down to poor money management or issues with personal spending.
Sticking to a budget, saving money where you can and regularly meeting debit payments and bills are all helpful ways of ensuring you don’t fall into debt, or can help you deal with the situation if you do.
Seek advice from debt charities and find out about any benefits or tax credits which you could be entitled to for lower incomes. You could also consider ways of boosting your own income, such as taking a second job or cutting down on unnecessary spending.
You can take stock of your finances at any point during the year, especially if your personal circumstances have recently changed.
What are the main causes of debt?
A variety of issues can cause debt. Some causes may be the result of expensive life events, such as having children or moving to a new house, while others may stem from poor money management or failure to meet payments on time.
Here are some of the more common causes of debt people face in their everyday lives.
Low income or underemployment
Some people on lower income jobs may find it hard to meet their bills or put money into savings because there isn’t much money left at the end of the month from their wages. Living pay cheque to pay cheque can leave you in a precarious situation should you face a large bill or unforeseen payment.
Divorce and relationship breakdown
As a couple, you get used to having two incomes coming in. But if you get divorced, your income could well be halved or drastically reduced. You may also have to cope with the major expense of legal bills, or regular payments to your former partner.
This is a good time to take stock of your finances, talk to debt support charities and consider if you need extra sources of work or a new job to bring more money in.
Poor money management
Get on top of your debts before they get on top of you. Look at your bank statements and make a spending diary to work out what you are spending money on, and how far your income goes in covering your outgoings.
If you find you are overstretched, see if you can cut your spending down or assess any savings you could make by switching your energy bills, phone contract or even your mortgage.
High costs of living
Some areas of the country have higher costs of living than others. Several things can factor into a higher cost of living, such as higher house prices, rental demands and longer commutes. All these factors affect regular expenses, which could leave you short when it comes to meeting other financial obligations.
Overuse of credit cards
Store cards and interest-free credit deals can sound tempting, but if you fail to keep up with repayments or are already struggling with others, it’s best to avoid taking on any more debt.
Talk to your credit card providers about a debt management plan and get help from groups like Citizens’ Advice for support on the best way to consolidate credit card debt.
It’s also best to avoid spending on credit cards exclusively. Although a credit card can offer you payment protection and an improved credit rating in some cases, unless you’re confident you can meet your credit card bills regularly, try and stick to cash or debit transactions for the bulk of your spending.
If you have several credit cards, you could look into consolidating your debt to better manage your repayment plan.
Sometimes accidents happen, whether it’s the boiler breaking down, or an illness that leaves you unable to work. Having access to savings, or a good insurance policy, can act as a buffer when you’re faced with large one-off payments.
These events are sometimes unavoidable, and just a case of bad luck, so it helps to have access to a fund to cover for such emergencies.
Declining health and medical expenses
Healthcare can be expensive, from purchasing medication to ongoing costs in the event an illness leaves you unable to work. Declining health and medical expenses are a common cause of debt for many.
Although it’s best to live a healthy lifestyle, some illnesses are the result of unfortunate events or an accident. In the situation that you are faced with spiralling medical costs, you should speak to a debt support charity or the relevant benefits department to see if you can get help with your medical expenses and health care.
The regular salary from a job provides a lot of security and means you know there is money to pay the bills and put food on the table.
Should you suddenly lose your job or be unable to meet your bills, you could be faced with looming payments or have to use credit or debt services to cover your costs.
Having access to savings, or a good insurance policy can help you in these scenarios. However, if you are unable to save, it’s worth looking into whether you can get any government help in the form of benefits.
Education and student debt
This is a very common form of debt, especially for young people. Going to university or extending your study with a master’s program can be a great step to helping you achieve your goals and work towards your chosen career. However, both undergraduate and postgraduate study are expensive, especially in the UK.
The debt repayments work in a different way to other forms of debt, however, with a small portion of what you owe taken from your wages when you do start working.
Unlike some other forms of debt, your credit score is unlikely to take a hit for having student loan debt.
Living beyond your means
The fastest way to get into debt is to spend more money than you earn. Though it may not always be possible, try and live within your means. Cutting down on unnecessary expenses and finding ways you can lower your monthly outgoings, such as travelling by foot or bike, or cooking at home can help to reduce your expenses. You could always put the money you save into a savings account or use it to pay off existing debt faster.
Not having a budget
Not having a budget is one of the simplest causes of debt. By not being aware of how much money you have, you could be more likely to spend more than you have access to. By monitoring your finances, you can stay on top of payments and be more aware of how much money is left in your account.
A monthly budget could go a long way to helping you cover bills and other important expenses first, as well as giving you knowledge of how much surplus income you have each month.
Lack of an emergency fund or savings
It can be hard to save money, especially when you’re already in debt or your monthly pay packet doesn’t allow for the wriggle room. However, if you save up a small emergency fund, or even enough to cover a few months’ expenses, you can put yourself in a good position should anything go wrong.
With an emergency fund, you could cover the cost of some emergency expenses without taking out a loan or cover yourself for a few months in the event of losing your job.
Having children is a wonderful experience and a life goal for many people. However, it’s no secret that having children is expensive. From childcare costs, to food, clothes and toys, there are plenty of extra expenses that come with having children.
Some parents may be faced with taking on extra debt to continue to provide for their children. In this case, it’s important that you speak to a debt support charity or seek further benefits to assist you.
Failed business and business expenses
Starting your own business can be a very rewarding and successful experience. However, many businesses can fail and get into debt. As the owner of the business, you will be liable for any debts the business incurs.
The cost of starting a business can be very expensive and some entrepreneurs take on debt, or a loan from the bank, in order to get things started in the hope that their business will be profitable enough in the future to pay back the loan.
However, this isn’t always the case and even if your business fails, you will still owe the bank the money you borrowed for start-up costs.
Ways to prioritise your debt repayments
If you are in debt, it’s important to pay back what you owe in a way that is fast, but also within your means. Speaking to a debt support charity can help you gauge how best to manage your payments, and they can sometimes help you organise an achievable payment plan with the companies or services you may owe.
There are several ways you can manage your finances effectively and prioritise your debt repayments.
- Priority payments – this is making sure the important bills are paid off first, sometimes even before your debt. Keeping up with your mortgage payments, rent and utility bills can avoid accruing any further debt.
- Pay-off debts – Paying off your debts to businesses, banks and loan providers is more important than any unnecessary expenses, such as eating out or trips to the cinema. Agree a payment plan with your providers to make sure you can manage your debt repayments.
- Plan a budget – Being aware of how much money you have and planning your monthly expenses can help you be certain of where your money is going. You could also see areas that you could potentially save money in.
- Monitor your cash – Keeping a close eye on your finances is important, so you can be aware of when bills are due and how much money you have in your account.
Find out more about finances and managing loan repayments with Norton Finance.