The Top 10 Causes Of Debt

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The Top 10 Causes of Debt


As I explored the internet for tips on frugality and saving, I discovered a recurring top 10 list detailing the causes of debt. This list appeared on several financial sites I frequent, and I couldn't help but scrutinize it. While some factors resonated, my own data suggests different reasons for my clients’ debt.

Here's what MarketWatch identified as the top causes:

1. Reduced income with unchanged expenses
2. Divorce
3. Poor money management
4. Underemployment
5. Gambling
6. Medical expenses
7. Insufficient savings
8. Lack of financial communication skills
9. Relying on a windfall
10. Financial illiteracy

Interestingly, the primary reason I've observed is overwhelmingly simple: spending more than you earn. In my experience counseling over 362 families, most debts arise from making financial decisions without understanding actual income. Shockingly, 98% of the people I coached couldn't accurately state their net income.

Often, individuals assume their annual salary?"say $56,000?"is entirely available. However, post-tax income is often significantly less. This misconception leads to overspending. I advise clients to calculate their net income immediately, detailing post-tax earnings per paycheck. This exercise frequently surprises them and prompts reevaluation of spending plans.

The key takeaway here: understanding your personal income is crucial. Many ignore this, allowing debt to accumulate until they're overwhelmed with something like a $9,000 credit card bill. To combat this, know your financial situation in detail. By gaining clarity on income, you lay the foundation to tackle and prevent debt effectively.

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