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Reasons For Debt Accumulation

Debt feels like a vaguely lurking evil of modern life framed as a cautionary tale for overconsumption-a byproduct of consumerism and moral weakness. Social media feeds are littered with success stories of those disciplined enough to pay off $20,000, $30,000, even $100,000+ in a matter of a year or a few years by making sacrifices like moving in with family, cutting spending to the bone, or perhaps working numerous jobs. Unfortunately, these types of successes feel like the exception rather than the rule for most Americans, given that the average American has $90,460 in debt in 2021.[1] This debt ranges from credit card debt to home loans and, for most people, feels like a part of the contemporary world. There are various reasons that debt can build up for people with more grey areas than unchecked spending. Most debt accumulation falls into three categories: employment issues, life-changing shifts, and money management skills.

Employment issues

Individuals can be underemployed or have a sudden reduction of income created by outside forces like an unexpected global pandemic or a shift in economic forces or trends think Uber’s effects on the taxi industry. Being underemployed is caused by more controllable choices like a new grad picking a major in a discipline that is hard to break into, or being saturated with applicants at graduation, then having to work in a different field with fewer threshold barriers but lower wages. Additional degrees or training where the completion cost doesn’t proportionally increase income moves people into debt. There is room and a need for all career paths, but debts amass when a thoughtful look at cost vs. income isn’t done can leave people battling debt for a lifetime.

Debt can also accrue if there is a shift in earning power for individuals who aren’t able or inclined to reduce living expenses and can’t or don’t move quickly to reduce spending. An example of this would be a parent reducing hours to keep up with the pandemic’s caretaking needs of a child. Debt can be created for individuals who aren’t earning enough to cover basic living expenses and may not have a support system that allows them to rely on outside financial help like moving in with family.  Reductions in income, not earning enough, and being underemployed are all aggravated by inflation. However, the inevitable steady rise of the cost of living is a part of life- periods of rapid inflationary increases like the one happening in 2020, 2021, and beyond force people into debt as help for reduced or missing income.


Life-Changing Shifts

Most of us understand that life can move in unexpected ways- an illness or injury, a marriage ending, or an extracurricular activity shifting to a costly harmful habit. These types of shifts can be high-priced and bill-producing. According to a recent Stanford study, it estimates that Americans have at least $140 billion in outstanding medical debt in 2021, for a population that is around 330 million people- each person, no matter their age, would have about $500 of medical debt if evenly divided.[2] Still, as we know, it isn’t. The sick or injured might be saddled with the bill for treatment on top of the lost wages and associated costs of not working full-time or at all.

Divorce is another significant life change that can create debt. The average uncontested divorce without major issues to dispute costs $4,100, and divorce with any larger concerns to decide, like child custody or disagreement of asset division, can be significantly more expensive.  In 2020, the average cost of divorce was $12,900, with the median cost of $7,500, and divorces that went to trial almost doubled that price to $23,300.[3] Divorce can also create debt with moving costs, repurchase of property that was your ex’s but was used as a couple think furniture, appliances, even vehicles, and work time lost for lawyer meetings, court dates, etc.

During a divorce, there is also a split of not only the assets but of debts like student loans, credit card debt, home loans, and medical bills, and depending on your state, this division is sometimes not as straightforward as the spouse that created the debt being on the hook for its repayment. Joint debts have an individual impact on debt accumulation. Joint accounts where one ex-partner files bankruptcy doesn’t erase the debt for the other person. Even when assigned to one spouse for repayment, joint debt is under the eyes of creditors the responsibility of all persons on the account-this becomes an issue if the spouse assigned the debt chooses or can’t pay the debt. The other spouse may need to repay this debt even if it is assigned to the other partner to save their credit.

No one starts their life thinking that their pastimes will rack up debts. But for some, these habits can spur gambling addictions and other addictions that vastly affect their overall debt growth. US gambling is estimated to be a $110 billion industry in 2020. For 23 million Americans, this addiction can cost around $55,000 in loss. [4]  In addition, people who fall into other addictive categories like drug and alcohol addiction can have devastating effects on their finances. The cost of substance abuse to the United States is estimated at $740 billion annually.[5] These addictions cost losses in wages, habit maintenance costs, treatment costs, and legal costs.

Money Management Skills

Money is a tool—the ability to use it effectively largely relies on education and implementation of skills for its management. Budgeting is an essential and often underrated skill that is needed to stem debt accumulation. Budgeting at its core is the understanding of how much money is coming in through earned income or other sources like alimony, investment dividends, rental income, etc., vs. how much is going out for living expenses, recreational spending, etc.  This flow of money, when unmonitored, can create debt if there are insufficient funds to cover expenditures.

But even when there isn’t a deficiency month to month, 54% of all Americans live paycheck to paycheck,[6] meaning one emergency or unexpected bill can send a household into credit card debt, which shows since the average American family has $6,270 in credit card debt.[7]  Emergency savings is another tool used to stem debt growth. But according to Bankrate surveys done in January 2021, fewer than 4 out of 10 people have enough savings to cover a $1000 emergency.[8] In July 2021, only 51% of Americans have three months’ worth of expenses saved which is the minimum amount recommended by experts.[9] Most financial experts advise that you have 3-6 months’ worth of living expenses and more if you are a business owner, have a particular circumstance that needs additional reserves like a chronic health condition, or have a high number of financial responsibilities.

Almost everyone has experienced themselves or knows someone who gets their first credit card, and suddenly their spending descends into regrettable impulses and years of repayment. But, of course, spending before you get paid isn’t just for the young or the credit card newbie; everyone has had moments in their life where spending beyond their income seemed necessary. But debt, especially credit card debt, is only advisable if you can guarantee prompt payoff to minimize interest payments. The average interest rate on credit cards is 20.25%,[10] and paying only the minimum is costly and sure to drag out over a long period.

Debt is often framed as a side effect of overindulgence, which can be a cause, but like most things-debt is more nuanced, and its reasons are less black and white than all debt is harmful and avoidable. Thoughtful consumption tempered with financial literacy and money skills can help create an environment where debt utilization is not a burden but a strategic tool in your economic life.

Want to sit down and get some help with your debt? Scarlet Oak Financial Services can be reached at 800.871.1219 or contact us here.