How to avoid the Consumer Debt Trap!

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Published: 06th February 2017
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Most Americans have debt. In fact the average household has roughly $8000 in revolving debt, not including things like mortgages or car payments. Unless you are independently wealthy, debt usually isn't something you can avoid. When done right, some debt like those mortgages, car payments and student loans can drastically improve the quality of your life by giving you a nice place to live, a well paying job and the transportation you need to get there. However, problems can arise when your debt to income ratio becomes too high. When this happens you could get caught in the consumer debt trap!

Getting caught in the trap is not fun. It's essentially when you don't have enough money to keep current in your payments. If you find yourself in this situation, it's important to discuss your options with a financial advisor who can guide you through your specific situation. The best way to get out of the debt trap is to avoid it all together. Here are some of the most common ways people get caught up in this trap.

Reduced Income or Unemployment:
Following the "Great Recession" in 2008, many people lost their jobs. For those who retained their jobs, many were expected to work harder for less pay to keep them. While keeping your job for less pay is generally better than being unemployed, it can still create a catastrophic situation for your finances. Unfortunately taking a hit in your income does not lower your rent or utilities and some pretty drastic living changes may be required in order to avoid getting trapped in debt.

Marital Changes:
Changes in marital status can have a big effect on your finances. Divorce cannot only be extremely expensive but it may result in a hefty monthly payment in the form of alimony or child support. Sometimes even getting married can negatively effect your financial situation as well, since your new husband or wife may come with a sizable amount of debt or generally bad money habits.

Medical Expenses:
Even with Obama Care, many Americans are one diagnosis away from getting caught up in the debt trap. For some, premiums are just too expensive so people take a risk and sometimes they loose. I actually have a personal experience with this. When I graduated college, I suddenly found myself without health insurance. At the time, I was also working a job that didn't offer any. I wasn't too concerned. I was healthy and only 23 years old but one month later I was in the hospital diagnosed with a severe case of Ulcerative Colitis. The hospital bills and prescriptions were adding up to a scary amount. I was fortunate that the hospital I was admitted to ended up working with me. Over time, I was able to pay off this debt but many are not that lucky. Doctors and hospitals have in general have become frustrated with unpaid bills and are more likely today to send people to collections.

Money Management:
For a lot of people, money management refers to figuring out where to spend all the money they make in a given pay period. What it really should mean though is how well you devise a plan on how to responsibly spend your money and execute it. Do you often give in to impulse buys and then wonder how you are going to pay your rent or your car payment? If so, you're probably not great at money management. It's important to recognize your weaknesses. Maybe you're weakness is shoes, designer purses or even premium coffee. Instead of making those impulse buys, create a comprehensive monthly budget and figure out a reasonable amount to budget for your favorite items. You may not be able to buy what you want, when you want it, but it will sure feel good when you do get to make that exciting purchase with the money you've saved up for it.


Stay Out Of the Debt Trap...Save!
As outlined above, most debt starts because of unexpected changes in your life. The trick to staying out of debt is to expect the unexpected! While things are stable you NEED to save a percentage of your income, even if it isn't a lot. If you are living paycheck to paycheck, a good way start is by recording ALL of your transactions for a month. Then highlight each of the transactions that you could live without (yes, you CAN live without a daily mocha frappuccino). Add those non-essential transactions together and resolve not to make those purchases next month. Saving even a small amount each month will help to keep you out of the debt trap and will also help you build a better future.

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