Many studies and personal examples have shown how debilitating debt can be. Feeling anxious about your finances can harm your health, relationships and wellbeing.
1. How Debt Can Affect Your Life
Many people lose sleep over credit card debt. According to American Psychological Association’s 2017 study, stress in general causes 45 percent of Americans to toss and turn and 62 percent of Americans find “money” to be the most common source of stress. It’s not hard to imagine these numbers skyrocketed last year as COVID-19 started its relentless march across the globe and resulted in unprecedented unemployment rates.
Higher debt-to-asset ratio is associated with higher perceived stress and depression, worse self-reported general health, and higher diastolic blood pressure. A Scientific American report revealed that financial stress can lead to physical pain and stress is known to cause ulcers and back pain. Besides anxiety, debt is also known to negatively affect relationships as it is very harmful to our psyche.
2. Common Causes of Debt
Debt can result from a variety of factors. Some of the most common circumstances actually result from everyday life situations.
Lower income jobs make it harder for people to pay their bills and even impossible to save, resulting in a financial disaster once an unexpected expense arises.
Losing a job is one of the most stressful situations one can go through as you not only lose money but also your self-esteem and security. Without a fund that can have you covered for several months, anxiety will easily get the best of you.
High costs of living
Living in cities with higher house prices and longer commutes can easily leave you short.
Getting separated from a partner means a halved income or at the very least, a drastically reduced one. If you’re in for legal fees that come with a divorce, you’re also in for major expenses.
Poor money management skills
If you are not on top of your finances at all times, it’s only a matter of time before debts get on top of you.
Accidents are bound to happen. You could fall ill or one of your appliances could breakdown and unless you have an emergency fund, you’ll be in trouble.
Starting your business comes with its risks as unfortunately, many businesses end up failing. Make sure you carefully evaluate what you’re in for when you are taking on a loan to start a new business to avoid a doomsday scenario if this happens.
3. Tips for Living a Debt Free Life
Living debt-free is not impossible.
50% of your income should be used to allocate your needs. You can spend 30% on your wants, but the remaining 20% need to go to your savings account or toward debt repayment. If you make this category optional, you won’t get far. Also, keep in mind that these percentages are the maximum you should spend so feel free to spend even less.
Save money wherever you can
If you live in a deregulated area, you have the power to choose your utility provider. That means you can save a good amount of money by switching to a provider with a more affordable rate. Do your research.
Read the fine print
Before you sign anything, know what you’re agreeing to. If a contract seems too complex, ask for help from an expert.
Live with debt-to-income ratio of up to 15%
Add up all your monthly debt payments and divide that by your monthly gross income. At 15% or below, you are in good shape. 20% makes you already in the danger zone or close to it as it means a fifth of your pay is going for things you bought in the past. Anything over a 43% debt-to-income ratio is a red flag to potential lenders, but everything above 20% shows that you are living beyond your means.
Takeaway – There is nothing in this world that is worth losing a night’s sleep over, and debt is no exception. In today’s world, living without debt seems impossible. However, with commitment and determination, living debt-free is possible.