There are plenty of obvious reasons that people find themselves in debt – medical bills, redundancy and personal loans to name but a few – but there are also some sneaky sources that you may not have considered to be harmful to your finances. Watch out for these sources of debt next time you’re battling with your bank balance.
[Read: 14 Signs you’re headed For Big Trouble with Debt]
More money
Yes, you read that right – sometimes getting more money can actually increase the chances of your falling into debt. How can this happen? Well, if you’re lucky enough to be offered a large sum of money (from a lottery win for example) you’re much more likely to mishandle it. Firstly, there’s the shock factor of having much more money than you’re used to and secondly there’s that little voice in your head telling you to treat yourself to things you normally wouldn’t look twice at. It’s a lot more difficult to account for larger sums of money, especially if you don’t have any hard and fast rules to follow.
Oddly enough, the same can apply when you get a new job or a promotion. Of course, you should be proud of yourself for getting more money in your pay packet at the end of each month, and it’s great that you’re climbing the career ladder. But don’t fall into the trap of automatically assuming that more money in your wages means more money for treats. Also, you may decide that you need a new car or a new wardrobe for your new job, but make sure that you don’t overspend as these extra items in bulk are a surprising source of debt.
So, how should you avoid turning these positive events into sources of debt? One strategy is known as the ‘one-third rule’. That is, separate any additional money that you start to earn or that you’re given into each of these categories:
- One-third set aside for taxes
- One-third put into savings for the future, such as a retirement plan
- One-third for fun!
Buying a house
You may think that a house is an obvious source of debt as it’s the most expensive thing that you’re likely to buy in your entire lifetime. But it isn’t just the mortgage which adds financial strain to your bank account. Many people compound their debt on buying new furnishings or redecorating the house, particularly when they first move in and they want to make it feel like home.
Of course, everyone wants to be happy in their own house. After all, it’s a big investment and it needs to be right for you and your family. But avoid creating additional sources of debt by carefully budgeting for any work that you want to do. And make sure that you stick to the budget too! Also, when you’re looking to buy a house don’t just work out whether or not you can afford the mortgage repayments – check that you can afford any necessary or upcoming maintenance. It’s sometimes best to spend a little more on the mortgage and get a house that’s ready to move into with minimum change than have the additional expense of maintenance work, which might not always go according to plan. Surf websites such as Rightmove to see what’s available in your area.
Restraining contracts
Many of us have fallen foul of a contract which sounds ideal in principle, until you work out the math and realize that you’ve been locked into paying for more than you bargained for. These sources of debt are not only frustrating, they can be misleading too.
One example of a contract that may not work in your favour is a car lease contract. You may think that it makes sense to lease a car, particularly if you can’t get a very good car on credit, but most lease contracts include expensive provisions and strict restrictions, meaning that you’ll probably owe a lot more than expected when to take the car back. Terms include mileage restrictions, acquisition fees and early termination fees. Make sure that you read the fine print and ask as many questions as you can so that you’re content that you’ve got all the information you need before signing on the dotted line.
Another type of contract which sounds ideal until you look a bit closer is those designed for cell phones. You may be desperate to get the latest model of smartphone, but when you’re tied into a two-year contract that shiny new phone doesn’t quite seem so good. Yes, you’ve technically got the phone itself for free, but you’re actually paying for it with your monthly contract payments which probably give you more free calls, texts and data than you actually need. How can you escape this? Look for providers who offer non-contract service options so that you only pay for what you need and so that you can switch at any time. Yes, you will have to buy the new handset up front, but there are refurbished models out there if you want to save a little extra cash.
[Read: Credit Score: Small Debt Forgiveness]
A little careful planning and budgeting and you’ll be able to avoid some surprising sources of debt and keep your finances in check.