Bad debt can be notoriously hard to get out from under. Debt can bury you 6 feet under and it’s totally legal after you signed on that dotted line to cover that payment.
Getting out of debt can be a struggle. Unexpected expenses arise, temptation persisted by examples of others and having to delay gratification over an extended period.
The seeming complexity of personal finance can be a difficult subject to navigate. Paying back debt requires you to sacrifice things that you wouldn’t have had to otherwise.
Oftentimes, debt is just the resulting simplicity of not knowing what was done. It’s common to hear people talk about debt like waking up from a nightmare – except it’s totally real and the baggage you’re holding is only getting heavier by the minute.
Most people will make 2-3 of these mistakes, I know I did. But learning what others like myself have failed to do makes for a great learning experience for you. Here are “biggest nails in the debt coffin” that every person should try to avoid on their journey to debt-free living.
Table of Contents
1. Delaying in Paying Debt
The first nail in the coffin is the lack of personal responsibility and the unwillingness to learn how money works.
There was a sob story published a few years ago back on the severity of the student loans crisis and I was angered that with all the REAL, crushing student debt heartache stories out there – this woman was chosen as the story feature.
The sob story featured was a 45-year-old woman who received her Nursing degree in 1991 along with $9,000 in student loans debt.
Not bad at all compared to the average college graduates today with almost triple that figure! Her lament was that 20-something years later, she now owed almost $22,000 in student loan debt from the original balance of $9,000. I would feel sympathetic towards her BUT the first thing I thought was…how in the world did you go 22 years and not pay off $9,000? She claimed it was a scam because her principal never seemed to go down.
Um, LADY, the principal didn’t go down because you paid the bare minimum for the last 22 years instead of targeting to pay it off. She barely paid off the interest accrued.
Related: Do You Think Financial Illiteracy Is An Excuse? (Poll) and Poll Results
An extra $1,000 a year could be made pretty easily with some creative side hustling or picking up an extra shift as a nurse. She could have also refinanced or made larger, more frequent payments to snowball the debt.
Having 22 years is ample time for $9,000 when you are on a nurse salary. One of the most effective way to reduce what you owe, or at least prevent the interest from ballooning, is to always pay your debt on time.
This applies to personal loans, as well as mortgages. If you cannot pay because something happened, InCharge Institute of America suggests contacting your creditor and explain your current situation so that both of you can structure a refinancing plan.
2. Having Low Income
Short and simple, if you don’t make enough money then you will struggle financially no matter how frugal you are.
Ballparking salary figures, are you making less than $40,000 a year before taxes? If you are, that ballpark figure is under the median US income of $55,000. In a situation like this, cutting expenses is no longer effective for debt pay off.
There’s little money to be saved without living on cans of beans. The only solution left is to increase your income or find ways to supplement income.
3. Confusing Purchases For Assets
Cars are an incredibly important part of a lifestyle in the United States. We use our cars to get to work, we use our cars to pick up our children, and we have cars to make things easier.
Unfortunately, cars are also the biggest liability, or at best, cars are a rapidly depreciating asset. The rest of most material ownership goes down from there. You can’t count 99% of consumer goods as assets or net worth.
Buying a flat screen TV on Black Friday for $200 off retail does not mean you added an additional $200 to your net worth. Sales can give you a sense of saving money by spending on things first but what is really happening is that you’re still spending. Learn the difference between a liability and an asset and never borrow money for a liability that depreciates in value.
4. Spending Too Much on Housing
Spending in a stately home or apartment is very tempting. Personally, I love good decor and high end finishes like the next person that comes along. However, according to Consumer Reports, nearly 20% of consumers with new houses are spending nearly 50% of their monthly income for their mortgage. The maximum amount of allotted should be no more than 30% of your monthly budget!
If you don’t need a huge house for your family, settling down with a smaller but still comfortable home. That smaller home will take care of your finances better than having to struggle financially with a larger home.
If size will be an eventual issue, look into smaller homes on larger plots of land so someday, when you need and can afford to upgrade, add on a housing addition with that extra land.
5. No Emergency Fund
Financial experts always recommend everyone to have a robust emergency fund. In case something unpredictable (and bad) happened, you and your family can have the funds available to help you through hard times.
Khan Academy advises on committing an automatic deposit every month into a regular savings account until the emergency fund is sufficient. The general financial recommendation is to have an emergency fund that can last you from 3 to 6 months going by the average monthly expenses of your family.
6. Expensive Meals Out
Buying a meal is very convenient. Just call your favorite food delivery service, wait for your food, pay it, and your dinner is done. Our family falls too much for convenience too – and we know it’s bad. It’s more expensive than cooking your own food. The other option is fast foods, but it’s far from nutritious and can create health consequences in the long run if eaten regularly.
There are a lot of recipes, cheap and healthy, that can be done with few ingredients and with little effort and time. These recipes are great for people living under the SNAP food assistance program provided by the USDA.
7. Too Much Student Loan Debt
The current student loan interest rates are higher than auto & home mortgages. The monstrous national student debt average is logically what happens when you push a bunch of know-nothing 18-year old into signing on the dotted line without so much as a basic personal finance / financial literacy course.
I’m actually surprised the student loan situation…isn’t worst.
Student debt can be good because financial aid provides prospective students who couldn’t afford to attend university otherwise and it teaches young adults about money along with responsibilities early.
The bad part is that student loans cannot be discharged and the education is grossly overpriced in the first place.
Student loan debt cannot be discharged in bankruptcy or given up with your citizenship. Occasionally student debt can be discharged with a qualifying disability but that’s not a guaranteed either.
Related: 4 Effective But Naughty & Semi-Illegal Ways To Pay Off Student Loans
The only way to dodge student loans is the proof of your death. And death is only applicable IF you do not have a co-signer. A large percentage of those in the debt coffin has a big fat student loan nail right in the center of their coffin box.
8. Too Much Credit Card Debt
Credit cards are notorious for hefty interest rates. Paying with plastic is addictive. Since we live in the modern world, almost everyone carries and uses credit cards as a convenience. The envelope system may be practical for controlling spending but plastic is much easier. Plastic can be practical because you eventually need a good credit score to facilitate trust and make larger purchases at a better interest rate.
9. Neglecting Your Health
For a lot of people, earning money is more important than getting enough rest to aid their bodies. I find that hardworking trait admirable but in the end, you pay either way if you neglect your health.
A lot of people live this way to make the ends meet and it’s terrible. Their line of work demands harder and longer hours. The sad truth is, work harder is important but working smarter is going to get you further. Perhaps a change of career or employment? Maybe take up an easier side hustle to make ends meet better?
If you want to get overtime, do remember that staying in a hospital bed with a liquid dripping IV in your arm is more expensive than taking a relaxing break at home once in a while, which is free.
10. Past Health Issues
Sometimes being and staying in debt is not a choice we get to choose. Persistent issues of health are nails in the coffin because it not only causes a decline in income potential, add-on possible health-related costs but it also has the disadvantages of opportunity cost. Health issues are particularly tragic because no one wants to be sick but illness is beyond our control.
11. Wedding On Debt
According to AARP, wedding expenses in rural places averages about $20,000. Having a wedding in East Coast cities can kick the price for as high as $80,000 per wedding. Although there is no current rule on who would pay for the wedding, costs can be shared among families. But starting a family with debt is not a good idea. Paying for wedding expenses that can cost nearly $35,000 just for one day of celebration is not a good idea. There are a lot of free or cheap ways to make a wedding memorable. Not to mention, research shows, in fact, the more you overspend on your wedding the statistically more likely you will get divorced.
12. High Cost of Living Area
Nothing erodes wealth faster than paying $6 for a carton of eggs at Whole Foods. That was one of my friend’s first complaints when she relocated from Washington to the Bay Area for work. Her rent jumped from $1,500 in Seattle to $4,500 per month for a small apartment in Pacific Heights in San Francisco. Building wealth may be easier in a wealthy metropolitan city but getting out of debt in a place where everything is more expensive is an uphill struggle.
*Disclaimer: There is disagreement on this subject, however. Although the almighty dollar isn’t as mighty in an area with a high cost of living, the counter-argument is that there’s going to be more money to pinch in a more expensive city where the salary and pay will be higher.
13. Higher Taxed Area
When our friend relocated to the Bay Area for work from Washington State, she received a 20% salary increase to make up for the higher cost of living.
However, living in California also means a state and sale tax of 10% in each category. Her 20% salary increase did not go towards her 300% jump in rent; it all went to the Golden State.
Each state has its own set of rules for getting their dues out of their citizens. In Washington, we do not have a state income tax so we save money by working in Washington whereas California has very high taxes.
But remember, higher taxed areas tend to have more economic opportunity and a more established system when it comes to education. There are pros and cons, make your geography work for you and your family.
14. Children Before Financially Readiness
Kids are one of the most expensive dedications out there. According to the US Department of Agriculture, raising a single child from childhood to 17 years can cause up to $233,610. The cost will be more tolerable in rural places, but will still cost you a lot.
If you are not ready in raising a child, either financially or emotionally, it is better to delay having a child. Little humans are very very very expensive. From toys to education to clothing – tots are a trillion-dollar industry.
But for those in debt with children already, it’s easy to see that it would be a lot easier to pay off the debt if the tots didn’t take up as many resources.
But considering there are over 7 billion people in the world – I’m going to take a gander that this rule isn’t followed closely because having children isn’t a 100% pure financial decision.
Naturally, I try to advocate solid financial standing before becoming a parent but it’s normal to have financial awakenings after having children driven out of pure love to better themselves for their children. Beyond adorable by the way!
15. Spending Before Saving
Majority of people have a habit of spending on expenses and leisure first before saving whatever the amount remaining from your paycheck. This is a kind of saving money, I give you that. But this method is not an efficient way of saving. According to the Federal Trade Commission, when it comes to spending money, you should “pay yourself first”. The expense to yourself includes expenses and savings. Always push yourself to save money and spending what’s left.
16. Ignoring Credit Score
Low credit downplays your chances to rent an apartment, overpaying on your auto loan and could even hurt your chances of landing a job. Ignoring your credit score may be easy to do but it has hard ramifications. Your credit score is made up of 35% payment history, 30% credit utilization, 15% length of your credit history, 10% how many lines of credit you have and 10% the type of debt you have. No one needs a perfect credit score, but it’s good to have a credit score of above 650 to 750.
17. Neglecting Small Fees
If you’re an investor, or if you use any fee-based service, you’ve probably encounter fees every once in a while. An example of a small fee is when you withdraw via an ATM machine from other banks. Some banks also charge extra fees when using your account online. These small fees are something that you probably would ignore but once they stack up together, you’ll realize that you’re paying a significant amount annually. Regulate your usage of services that mandate small fees and you will see a small improvement in your finances.
18. Impulse Purchases
On your way to work one day, so you decided to buy a cup of coffee from a very popular coffee chain. And because you have extra money, you decided to buy something, especially for your caffeine shot. Association for Consumer Research simply defines impulse buying as unplanned buying or an unnecessary purchase that is not in the budget or expected. Impulse buying usually occur when you have extra cash on hand to spend. Impulse buys are easy enough to fix though. The answer to this problem is to always commit in your budget no matter how much momentary cash surplus you have at the moment.
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No debt other than the $385k or whatever we have left on the mortgage!
Also interesting note about CA: it gets a bad rap about it’s taxes, but it might not be as bad as it looks. When I moved from MN to CA, my state income tax liability actually went DOWN because I was paying more of my income at a lower rate. It’s true that my MARGINAL rate was higher, but my overall tax liability was more favorable. So that map is great, but it doesn’t pain the full picture because of how tax brackets work (and that seems to only take into account the highest marginal tax bracket).
I think CC debt is one of the worst, not only because of how expensive it is, but because it often points to a bigger underlying behavioral issue. 🙁
Sidenote I’m amazed, it looks like I beat Ms FAF on replying to this <3
Omg! Hahaha it’s a fluke! She’s out of DC and staying in a hotel at the moment.
Oh haha I accept defeat, Dave! :p
??? you both!
Ooooh great point Dave, I forgot to add that! California also has grandfather property taxes. Jared’s parents brought their house 30 years ago and their property tax is essentially nothing despite the fact that it’s now worth a million dollars.
I can’t imagine letting student loan debt – especially that little – drag on for 22 years. Looking at the interest accrual on mine (at 8.5%) lit a fire under me to get them paid off ASAP.
I know right?! I felt the same fire with my debt.
Great points and a very original title! I seem to have #3 and #7: having kids and living in a high cost of area.
We sometimes joke that we can’t return Baby FAF for a refund, but we sure hope to move to a cheaper area on the future.
I get Jared’s point about having bigger fish to fry though. There is definitely more opportunity, but being able to buy a huge house for less than $300k just sounds so appealing!
Is Mr. FAF still keen on moving to the Bay Area? Ughhh omg, I browse real estate in random cities and drool at the mansion you can get for $300k!! It’s like double the price for half the size here!
How to you let $9,000 of student debt go on for 20+ years!?? Even during that time in the early 90s you can try and pay it off within 5 years. That’s mind-boggling!! Even worse the lady paid $22K in total because of the interest and inflation!! Dude!! That’s more than double of the original loan amount. C’mon now!
Not even joking. I think if a person is blind to it, they can do anything. My friend woke up with $80k of debt and suddenly realized that she’s in a lot of trouble.
I’m so happy that I didn’t have to take on student loan debt for university (huge shout out to mom and dad) because so often huge student loan repayments are what trigger a continuous debt cycle.
I have had to deal with some credit card debt when I was young and foolish but that feels like nothing compared to what seem people are facing. I so wish that there was more financial education to teach younger kids about the impact taking on debt can have when you’re an adult.
Debt cycle is vicious! To think what I could have done with my $20k otherwise in 2012!
It is ever so important to contribute to kids college fund if not fully funding at least some, compounding will be on our side if we start early.
Oh there are car companies who totally disagree with that! ;O
Having children has a monumental effect on your net worth. We have 3 and it costs so much for everything from food and clothes to sports and activities. We have friends who don’t have children and it really is a completely different lifestyle. They’re able to sock away lots of extra money for retirement because they don’t have all the expenses that kids bring. Not that I’d want to change places with them, I love my family beyond words and I’d never give that up.
How old are those 3 tots Mike?
Yikes! They are all pretty bad, but #1 is the worst of the lot. If you don’t take it upon yourself to learn about personal finance, you’re screwing yourself. Even if things are going well, it would be better if you know how to save, budget, and invest.
I’m sick and tired of Oregon state tax. Florida and Nevada are looking better and better.
Oregon has no sales tax! (But I guess that’s better if you actually shop a lot of consumer goods, which I’m sure you don’t!) Florida is pretty sweet for retired folks!!
It will be interesting to see how the tax plan shakes out. Eliminating the deduction for student loans is on the table. I would think that would make it more stressful for those carrying student loans. Plus the elimination of deductions for high-tax states. All eyes on Washington this week!
Oh and the tightening of PSLF (student loan forgiveness) program too. The world is watching – not that DC cares!
I’m in the high cost of living along with high savings rates camp, although I have pretty much no independent life experience living somewhere low cost of living so what do I know 😛 I wonder what it would be like? In my mind if you make less money but can’t significantly increase savings compared to when you lived in a high cost of living city, it doesn’t add much except psychological relief that you aren’t paying as much dollar wise.
I’m surprised by the first student loan example since those loans are usually simple interest…how did the balance grow unless that was just the accumulated total of the interest or she didn’t even pay the minimum?
Great post. Interestingly enough leverage (debt) has been the source of 60% of my wealth. I bought several properties early on. Took a big risk as if one of them was tenant free for a month we were done! But now have 2 paid off apartments worth north of $1.5m and another 4 on their way to being paid off.
Debt is scary but used well and within your means and only to buy real appreciating assets can be a significant creator of wealth.