We are all born debt-free, and 18 years later, most of us get our start in life the same way. Yet somehow, many of us fall into debt. Some accumulate small debts; others accumulate large debts. But why? What are the reasons? Let’s examine them here.
Reason #1: Premature Lifestyle Enhancement
The most common reason people go into debt is what I call “premature lifestyle enhancement.” It’s caused by wanting what you haven’t earned, and demanding that you have it now.
How do you acquire the things you want when you don’t have the means to pay?
You use credit, most often in the form of credit cards. The use of this credit puts you into debt.
Perhaps you are responsible at the start. You pay off the balance before it accrues any interest. You think you are using credit responsibly, and so you use it more.
But before long you are carrying a balance. It is accruing interest. Upon reviewing how much debt you’ve accumulated, you find it will take months and possibly years to pay off the balance.
And so it goes for many people who have the best intentions of using credit wisely.
Premature lifestyle enhancement manifests itself in many ways. The most obvious examples are in acquiring outward signs of success. Homes, cars, furniture, clothing, and jewelry are the primary examples.
People buy homes that are too expensive to impress their neighbors, not because they need the space. They pay extra for granite counters because they are fashionable, not because they are more functional. They pay a premium to live in prestigious neighborhoods because they want to appear successful, not because they are any better or worse than other neighborhoods.
People buy fancy cars for similar reasons. They want to feel important… to demonstrate their superior status. Unfortunately, fancy cars are only symbols. They represent status, but—like so many luxury items—are often a better indicator of living beyond one’s means.
To correct this, we ought to realize we can’t have everything the moment we strike out on our own. We cannot properly have what our parents have without earning it first. Lifestyle and status mean nothing, especially if there is no substance behind them. It is good to remember Solomon’s words…
“One man pretends to be rich, yet has nothing; another pretends to be poor, yet has great wealth.” Proverbs 13:7
Reason #2: A Desire to Get Rich Quick
There is a saying in marketing. That is, it is easy to sell money.
How do you sell money? Simple. You position a product as an investment that pays for itself.
Example: “Your price: just $499. What’s more, this product practically pays for itself. Within three months, you could easily be making five times your investment every single month! How’s that for ROI? As you can see, there’s almost no risk to you whatsoever.”
And so on.
If you want to get rich quick, it almost doesn’t matter what is offered or how expensive it is. You justify the expense by the future income you imagine you will have. “How easy it will be to pay for this product when I’m earning over $100,000 a year,” you think to yourself.
It is for this reason you feel no problem with using your credit card to pay for the product even if you don’t have cash to pay for it.
Taking student loans to pay for college is often justified by a similar psychological game. Most people dislike learning. Therefore, they do not go to college to learn. Rather, they go to college to get a good job and increase their earning power. If not for the money motive, far fewer people would ever go to college.
Unfortunately, whether “investing” in a home study course or a college education, the income you imagined you would earn almost never materializes. If it does materialize, it takes much longer than you expected. And so you are left with an onerous debt and a big monthly payment. You are worse off than when you started.
Here’s the kicker. Those who’ve been infected by the “get rich quick” bug often don’t stop with a single purchase. After one failed attempt to become wealthy, they are off to the next opportunity. It’s practically a disease. I should know since a lot of my debt was caused by my desire to get rich quick.
Despite having read Proverbs multiple times before my twenties, I still violated one of the principles it contains…
“A faithful man will be richly blessed, but one eager to get rich will not go unpunished.” Proverbs 28:20
Reason #3: Unexpected Expenses
Of all the causes for debt, this one is the most forgivable. Every person will have unexpected expenses in his life. But are they really “unexpected?”
The fact is, unexpected expenses are actually quite predictable. They will happen. The only unknowns are when and what. You don’t know exactly when you’ll be hit with an out-of-the-ordinary expense, and you don’t know what the expense will be related to.
Why then do we say it is unexpected?
I believe it’s because we dislike saving money. We believe saving money deprives us of lifestyle (see Cause #1 above). So we have deceived ourselves into thinking nothing will ever go wrong. If nothing ever goes wrong, we have no reason to save any money!
Of course, this is all just a vain effort to justify our irresponsible behavior.
It’s probably no surprise that some of the most common “unexpected” expenses include…
- Car problems (alternator, water pump, transmission, etc.)
- Injuries and illness (broken bone, flu, tooth cavity, etc.)
- Home repairs (frozen pipe, garage door springs, loose shingles, etc.)
Knowing that you will face these expenses from time to time, it makes sense to plan for them. If you don’t, you will be forced to depend on credit to pay for them. This can quickly put you in a situation where you are carrying debt.
So what should you do?
Start setting aside a little bit of money each month. Earmark it to pay for unexpected expenses. Use it when you are faced with a bill you did not expect. Don’t use it for anything else besides this.
You might call this fund your “Emergency Fund.” It is to be used when you have a cash emergency—for those times when you don’t have the cash in your monthly budget to pay for the emergency. The money in your “Emergency Fund” makes up the difference.
These are the three primary reasons people fall into debt: premature lifestyle enhancement, a desire to get rich quick, and unexpected expenses. Recognize which of these is the primary reason for your debt. Then deal with it accordingly.