Dealing With Debt: 5 Reasons You’re Headed for Financial Ruin

Everything you need to know to tame your debt and keep it under control

How you think about money can leave you drowning in debt

It’s no secret that Americans are mired in record amounts of debt. The average credit card debt per household is $15,788, according to CreditCards.com, an online resource center for consumers. “The root cause of the skyrocketing debt is interest rates, or accrued interest,” says Dr. Donald Reid, a Brooklyn-based certified financial planner. “Many people have no clarity on the actual real cost of money.” Where are Americans going wrong when it comes to dealing with debt and managing finances? Check out these five financial blunders that will lead you to ruin.

Not looking beyond teaser rates: Mortgages with low interest rates attracted many now embattled homeowners. Low interest and down payment offers make big item purchases – cars, homes, electronics – even more attractive. “It’s called a teaser [rate] or Adjustable Rate Interest,” says Reid. “I give you 1% for the first five years and at the end of that five years, it’s going to shoot up to 15%.” Before making a purchase, it’s important to get an idea of what the monthly payments will be once the teaser rate expires. Online calculators can give consumers an idea of future payments.

Failing to understand the business cycle: While economic growth is experienced over long periods of time, economies also experience periods of correction and expansion during the short term. In other words, for every boom, there is an economic bust that’s sure to follow.  “Banks were of the opinion that property values would go up ad infinitum,” says Reid, regarding the once booming housing market. “What we have right now is a correction.”

“It” can happen to you: Reid says that while many people saw others losing their homes and teetering on the brink of a personal financial depression, most people were still disconnected from their own reality: “A lot of people said, ‘It can never happen to me. That’s happening to those people out in Manhattan or on the other side of the country,’ and then they were hit with foreclosure.” Even with careful financial planning and management, unforeseen events are sure to arise. Whether it’s socking away $20 a week in a money market account, establishing contingency plans for financial stability in case of a job loss, or emergency medical expenses, plan for the unexpected. Remember, “it” can happen to you.

Staying mum on money: “Talking about financial security conveys a sense of financial insecurity,” says Reid. So instead of discussing finances, it’s politically correct to leave those issues behind doors, he adds. But that’s one reason many are currently in financial ruin. An open dialog with your spouse, partner, children, family and friends can help you gain insight into how you should manage your own money, and allow you to paint a realistic financial picture.

Personal conditions are not permanent: Whether you’re the CEO of a thriving enterprise or at an entry level position, one thing is constant–change. And it happens in a flash, says Reid. “If your job or your business goes south, guess what? The family is going south with you,” he says. But just as quickly as you can be thrust into a financial abyss, you can also gain the resources and tools needed to rise from the ashes. It’s important to understand that your job is not secure, and it’s wise to have other sources of income as well as your emergency savings. Steer clear of spending more than you make and practice living below your means – and bank the difference.

ACROSS THE WEB
  • MW in the ATL

    How about #6…stop creating debt!

    • renita burns

      I agree MW, but one of the keys to not creating debt is to understand how debt is accumulated in the first place. I think many people don’t take into consideration the interest rate when major purchases are made. How we understand money is a big factor when it comes to how we use it/misuse it.

  • Maurice

    The way I look at it, we are in a serious war with these people that want our money, so my new thing is this, Every day I go without spending money I WIN, that means walking more and driving less, that means eating less, No 1000 cable channels that I dont watch, No eating out, No buying new cloths or shoes I because just a few is good enough, Just total cutting down on spending. No more debt, the best thing is save and invest (invest in companies that I understand for example McDonalds ,Johnson & Johnson or GE) So it does not matter how much you make, what matters is how much you save and invest. My humble advise STOP SPENDING NOW! Stop being slaves to the banks, they dont care about you.

    • TeeTheBarber

      Maurice – well said!!!

    • Crystal

      Maurice, you have said it well. These ideas should be resonated in each home starting tonight. I have recently begun to overhaul my finances and retrain my family on money matters due to a job loss. Luckily, we are in the stages of recovery. I tell my daughters, “I haven’t met a credit card yet that was my friend”. Hopefully, they will take it to heart and make smart money decisions starting as young adults.

    • mike

      Words of wisdom for people of any color, not just ‘blacks’.

    • Al

      Stop spending??? Not likely. Saving, Investing, spending appropriately is more practical. My wife and I max out our 401k’s, put money into an emergency savings account each month, we’re saving enough money in our children’s 529 plans to the point that we will be able to cover all of their expenses (tuition, room/board, books) if they go to state universities (they’re responsible for the difference if they go to private univerisities). We also have targeted savings accounts for short term goals (car replacement/repairs, vacations, etc.) and we also go out (plays, concerts, movies, etc) regularly, etc. We carry no credit card debt. We’re not rich, but we long ago prioritized saving and investing over just spending.

  • pumba

    The Dave Ramsey course will open up peoples eyes. It’s not easy but, truthfully it’s the only right way to go and the only way to invest properly in your future. Do it and sleep better at night.

  • http://cnn Dan

    How about – The government is about to run out of money