Top Causes of Bad Debt

Today is the day of my preliminary exam – please send your prayers and good wishes my way!  So that I can focus on my presentation, Jon from MoneySmartGuides is providing our guest post for today.  Money Smart Guides is a personal finance blog that aims to teach the basics of personal finance with a focus on investing and paying off debt. After graduating college and getting into credit card debt, Jon paid the debt off and is working towards a goal of retiring early. He has been employed in the financial services field for over 10 years and currently works as a financial advisor.  Thank you, Jon!  – – UPDATE: I passed my exam! I am now a PhD candidate and on track to graduate in spring 2014 (more or less)!


debt weighing you downThere are many reasons why people get into debt. I am hoping through writing this, I can inform those that are not in debt avoid it by not making the same mistakes that others have and as a result are now struggling with trying to get out from under it.




Divorce is one of the worst experiences someone can go through. The reasons why people get into debt through divorce are countless. First you have the attorney fees. Even if you are looking for a quick resolution, your soon to be ex may not be. That means more work for your attorney and more bills for you. From there, you have the division of property. Imagine selling everything you have and then only getting half of the money. On top of that, your spouse might spend everything you have or max out all of the credit cards out of spite before he or she files for divorce. It’s an ugly mess that I hope no one reading has to go through.


Not Cutting Expenses When Income is Reduced


Many times we delay reducing our expenses even after our incomes have taken a hit. And the guilty ones aren’t just those without a budget. I have a budget and was guilty of this in the past. We start out spending like usual and then realize that we overspent as the month comes to a close. We then use our credit cards to fill the gap, thinking that our incomes will magically increase the next month. The sooner you realize it won’t and cut back on your expenses, the better off you will be.


Poor Money Management


You need to have a budget. Having one will greatly reduce your chances of spending more than you earn. Realize that it won’t eliminate the possibility, but having a budget will make it less likely. If you do spend too much, you will notice it much quicker with a budget and can adjust accordingly. I’ve been in the situation where I didn’t have a budget and would just spend. I had no idea where my money was going. If you told me I spend $X at ABC store, I probably couldn’t even tell you what I bought. Now that I have a budget, I can see on any day of the month how much I’ve spent in each category and how much I can still spend. If it’s the 15th of the month and I know I can only spend another $25 dining out, I am going to make it a point to find something to eat in the house for as long as I can so that I don’t go over budget. Take the time to make a budget and stick to it.


Medical Expenses


The cost for procedures is only getting more expensive and will only continue to increase. Not having adequate insurance or insurance at all is risky. One serious injury can saddle you with hundreds of thousands of debt. Make sure you have insurance and that it is adequate for you. This includes disability insurance. Even young, healthy adults need to look into disability insurance. While your chances of passing away at 30 are relatively small, the chances you are injured in a serious accident are much higher. How are you going to pay your bills if you cannot work for two years?


Banking on Windfalls


Many people live in the future. By this I mean they will apply for a job and expect to get it. Since they are getting that job, they start spending like they have it. The rationale is that they will have the money next month. Unfortunately, next month turns into another month and continues. While it is nice to get windfalls, don’t count on them. Continue living as if you didn’t get it, because there is a chance you might not. And when you do get it, act as if you didn’t get it. You’ll be better off by not making quick decisions.


I know of someone whose parents are wealthy. He thinks that he will be inheriting a lot of money one day. As a result, he has a ton of credit card debt. His rationale is that he’ll be getting a lot of money (think a few million) one day and he will pay off the debt then. But, his parents have told him multiple times that they are giving all of their money to their alma mater, not to him. He refuses to listen and still lives as though he will be getting the money.


Not Saving


If you have no savings and an expense comes up, you are going to have to go into debt to pay it off. If the goal is to avoid debt (which it should be), you need to save money. Start out saving 10%, then increase it from there. Here’s your plan: Find out what your company matches in your 401(k) and invest that amount each month. Then figure out what 5-10% of your monthly salary is and set up an automatic transfer from your checking to your savings account for that amount each month. As you become comfortable living on less, slowly increase your savings amounts. Oh, and don’t spend the money in your savings account!


Financial Illiteracy


Schools don’t teach personal finance. We learn from our parents or others. Sadly, if our parents are bad with money, chances are we will be too. Be responsible and learn about personal finance. It may not be the most interesting thing to you, but if you learn the basics and use what you learn from it, you will be much better off.


Final Thoughts


There are many things causes of debt. I’ve highlighted just a few. While some (like divorce) you really cannot plan for, the others are within your power to control. If you are stuck in debt, make the decision to change your habits, one at a time to slowly dig yourself out. You won’t get out of debt tomorrow, but you didn’t get into debt yesterday. It will take some time, but what you learn and the experience will be more than worth it.


What are some other top causes of bad debt that you can think of?


photo from Free Digital Photos


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21 Responses to "Top Causes of Bad Debt"

  1. Good post Jon! One other thing I would add is simple apathy towards debt. We’ve seen it in our family and it’s always amazing that some know better yet they could really care less in regards to racking up bad debt. Working in the finance field, in the past, myself I was always saddened at the divorce issue. It was just so crazy to see people who assumedly loved each other at some point do what they could to put the other in debt.
    John S @ Frugal Rules recently posted..Taking the Plunge: How to Build a Client Base For Your Small Business

    1. Thanks!

      It is disappointing when you know better but still fall into the debt trap. My advice for those would be to not be so hard on yourself at first. We’re only human and we do make mistakes. The key is to learn from those mistakes and grow and become better. Unfortunately for others, we can’t make the the light go on, but we can offer our advice and time so that hopefully they will learn from their mistakes sooner rather than later.
      Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  2. Student loans for a degree you wind up not using are another example of bad debt. When I look at that balance of over $30,000 I think to myself, why did I even bother?
    Edward Antrobus recently posted..The Cost of Disorganization

    1. Good point Edward. It’s tough when you go to college and spend all of that money and don’t end up using the degree.
      Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  3. I have experienced all of these with the exception of divorce and counting on windfalls. But I do know so many people who financially struggled after divorce.
    Budget and the Beach recently posted..One Step at a Time: Part One

  4. Counting on windfalls is definitely a “good way” to get yourself into debt. We all remember the Lampoon’s x-mas story when the dad buys the swimming pool because he was counting on his x-mas bonus. Bf gets a yearly bonus based on how well his company does. We never count on that money and assume he won’t get one (so when he does get one it’s just a nice thing that happens, not a dissapointment and a crises if it doesn’t).

    And a big Congrats for passing your exam! Woo hoo!
    KK @ Student Debt Survivor recently posted..I’m Dating a Financial Stud!

    1. That’s a great analogy! And I love that movie too. It’s easy to fall into the trap though. Good job avoiding it.
      Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  5. JT says:

    I am glad that student debt was mentioned cause that is a big one nowadays. I too have fallen into several of these traps and simply feeling like I deserve a better lifestyle prior to dealing with the debt in my life. Keeping up with the Joneses doesn’t make sense either.
    JT recently posted..Debt Payoff Progress for February 2013

    1. It definitely is not smart to try to keep up with the Joneses. Keep plugging away at the debt!
      Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  6. Good luck, Emily!!

    Great post–I’m always shocked when people claim ignorance as a reason why they can’t get a hold of themselves financially. Ugh…pick up a book and read; you’ll do yourself wonders by taking the time to properly educate yourself. 🙂
    The Happy Homeowner recently posted..Increased Productivity = More Money in My Pocket

    1. Emily says:

      I agree that it is so easy to learn how to be halfway decent at PF but I bet that isn’t the issue, really. They are probably scared of finding out more that they would have to change to do things “right” or unwilling to change and using ignorance as an excuse.

      1. I think it goes along with them being scared. I know when I was younger and got myself into credit card debt, I hated opening the monthly statement. I knew it was going to be bad, but still kept spending anyways.
        Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  7. Do or Debt says:

    Nice post! Congrats on passing the exam! I have been a victim to all of these minus divorce and banking on a windfall. I don’t expect money from anyone and it is truly a delight if I get extra money. I would say education is a huge way to get into debt. Even state colleges are hiking up tuition.
    Do or Debt recently posted..Sunday Worship

    1. You have to do your homework to determine how you are going to afford going to college without incurring tons of debt. It could mean going part-time, starting off at a community college, working part-time, or all of the above!
      Jon @ MoneySmartGuides recently posted..Can You Make Money Taking Surveys?

  8. Good post. I think there are far too many cases where people end up making many good decisions otherwise, but falling into one or two of these situation can end up crippling someone financially.
    Tie the Money Knot recently posted..Husband and Wife Both Work, But She Does More Around the House

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  12. Waiting for the windfall is a killer. The government offered incentive bonuses for implementing meaningful use of electronic records. I know some providers who are counting on this to pay bills, but there is no guarantee you will get through all the hoops the government wants. It’s much better to enjoy a windfall, but not make plans until money is in hand. Otherwise, we might as well go buy lottery tickets.
    Kim@Eyesonthedollar recently posted..Eyes on the Dollar 20/20 Roundup #29-Gotta Love the Neighbors

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