6 Reasons Why People Get Into Debt

In order to avoid ruining our lives in the near future, we should take some time in understanding the reasons why people get into debt and what we can do to deal with it and avoid being in the same situation in the future.

Before the global pandemic brought by COVID-19 hit us, I had a very minimal debt. However, as weeks go by, I find myself accumulating debts that I’m using to get through this situation.

Luckily, the debt is very manageable since I live a frugal lifestyle. I’m also lucky that I’m only in debt with my family, which means I don’t get to pay interest and I can make staggered payments in the next few months.

This lockdown situation gave me some time to reflect on how I got into debt. While reflecting, I’m asking myself, what could have I done differently in the past that could help me avoid being in debt. And also, what will I do in the future to avoid being in this situation again.

Most of us get into debt because of a variety of reasons both outside and within our control. Some get into good debt because they are well aware of how they can use debts as leverage but a lot get into bad debt because of a variety of reasons that can be prevented if we just allow ourselves to think through our decisions in life.

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Table of Contents

Is there such a thing as Good and Bad Debt?

Debt is defined as something, usually monetary, you owe to someone. As I delve deeper into FI, I learned that debt is sometimes categorized as good debt or bad debt.

Good debt is something that can enrich a person’s net worth or value in time while bad debt is anything that decreases its value once you get it.

An example of good debt is taking a mortgage to buy a rental property. This is the most common good debt that we are all familiar with. I’ve taken a mortgage myself five years ago to buy a very small (19 sqm) condominium studio unit.

It is located very close to the business districts in Metro Manila. I’ve lived there for 2 1/2 years. And I’ve been renting it out for almost 2 years. My last mortgage payment will happen in the first quarter of 2021.

The loan amounted to almost P1.3M (approximately $25K) and in less than 5 years (as of the time of writing) the appraised value of the unit is at P2.4M (approximately $47K). The entire building is always fully occupied because it’s located in between three business districts.

I was lucky to be in the right place at the right time because the in-house interest that I got was only 6%. And even though it was still the pre-selling period when I bought it, the building was already finished. I was able to move in after just one month.

I consider this a good debt since I’m now earning some money from it even if it’s still not fully paid.

The simplest example of bad debt that a lot of us can relate to is buying gadgets on a whim even if it’s on a zero percent interest promotional rate. The value of any gadgets like mobile phones depreciates as soon as you open the box. I’m so guilty of this.

A few years ago, I often buy a new mobile phone on a yearly basis and a new laptop every two years. I just give my old gadgets to my siblings or if they don’t want it, it just sits inside my cabinet.

Another example that I was also guilty of is buying clothes using my credit card even though I have tons of clothes already. Luckily, I learned how to thrift and it helped me save a lot of money.

However, there are certain debts that can either be good or bad depending on what you use the money for and on how prepared you are in managing your debt.

Good debts can turn into a nightmare if you’re not well prepared to handle them.

Bad debts can turn into a blessing if you eventually got to use them to earn money.

There really is a fine line between those two and some people don’t believe in the existence of good or bad debt.

For some, debt is debt, and regardless of the intention, as I’ve just mentioned above, if you’re not prepared it could be very detrimental to your financial and personal life.

6 Reasons Why People Get into Debt

Living Outside Our Means

One of the main reasons why people get into debt is by living outside our means. I’m also guilty of this in the past. I used to spend a lot of money on weekends drinking at expensive bars or eating at expensive restaurants.

And I often find myself out of money a week before the next paycheck. When that time comes, I always resort to using my credit card.

I used to book flight tickets and hotel accommodations using my credit cards just to party on some islands for a weekend with my friends. I was never bothered by living outside my means because I was surrounded by people who were doing the same thing. Back then it felt like it was the normal thing to do.

Debt is a great source of inner unhappiness. - Debasish Mridha Click To Tweet

What to Do:

If you are aware that you’re living outside your means, the first thing that you have to do is to track your expenses in order to identify what your biggest expenditure is.

Break it down into smaller bits and take out the unnecessary things from your list or the things that you can live without. Using this data, start creating a realistic budget that you can live with.

Another thing that could help is by surrounding yourself with people who are living within their means. Try to distance yourself from people who are living extravagant lives even though they’re living from paycheck to paycheck.

I know that this is a very difficult thing to do.

One of the best ways to change a habit is also to change your exposure to behaviors that you want to be influenced by.

You Can’t Make the Ends Meet

Sometimes, even if you are a very frugal person, and even if you follow the stricter budget, you might still end up in debt just to make ends meet.

This is the sad truth for a lot of people.

I have observed this situation from my parents and other relatives. Both of my parents did not finish high school thus unable to earn a decent income from their jobs.

In the Philippines, laborers and those who do blue-collar jobs often get paid the minimum wage. And in some cases, some people even below the minimum wage.

Despite having a very small income, they have multiple children. They were probably unaware during those times of family planning. They are very frugal individuals but, you know how expensive it is to raise a child.

A lot of debt was incurred to pay for food, utility bills, rent, medical check-ups, and hospital bills. As I and my sibling grew up, school fees and other related expenses also piled up. This is something that I and my other sibling helped pay for as soon as we got our own jobs.

Luckily, my parents, worked so hard to ensure that all of their children finish college in order to have better chances in life.

Success is not final, failure is not fatal: it is the courage to continue that counts. - Winston Churchill Click To Tweet

What to Do:

If you are one of those people who can’t make ends meet despite working hard and despite working long hours, I highly suggest that you do the following:

Create a budget for the basic needs you can live with
Check if there are items in your budget that you can remove or find a cheaper alternative for those items
Educate yourself by reading personal finance books or blogs and try to learn from other people’s experiences (with caution – not all solutions might apply to your situation)
Assuming you still can’t make ends meet even with the most basic budget, look for a higher paying job
Supposing a higher paying job is unavailable in your area consider moving to another location (to minimize risk, make sure that you already have employment before you move to a new place)
In case relocating to another place is not possible as of the time being, consider creating another source of income (a second job or a side-hustle)
If you are unsure and confuse about what to do, seek some advice and help from family and friends or government and non-government organizations specializing in this kind of situation

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Indulging in Vices

Another reason why people get into debt is because of their vices. Regardless of how much money you make, if you have uncontrollable vices that cost a fortune then you will always end up in debt. Some of the most common vices that often put people in debt include drugs, alcohol, and gambling.

I’ve seen people lose everything because of gambling. Some people pawned their jewelry, cars, and even their houses just to be able to gamble. Some get into humongous debts just to be able to gamble in casinos.

Sometimes, it all starts as a harmless night out with friends. Casinos, aside from being known for gambling are also known as entertainment hubs. There are live bands, restaurants, shopping areas, theaters, cinemas, hotels, etc. Once you go there, you might be easily swayed to try one game.

One game leads to another, and another until you find yourself enjoying being in the casino and it all goes downhill from there. Same as with drugs and sometimes with alcohol. It all starts as just one drink, one puff, and then the rest is history.

Debt is like any other trap, easy enough to get into, but hard enough to get out of. - Henry Wheeler Shaw Click To Tweet

What to do:

If you know that you have a personality that gets easily influenced by or gets easily addicted to something then, you might as well not try it. If your friends are having a night out at a casino, then might as well not go.

Find alternative places to entertain yourself. The choices are actually endless. You can either spend that money to go and travel to see the places you’ve always been dying to see. Or to try out new experiences that you’ve been always wanting to try.

Lack of Financial Education

I admit that I am one of those people who lack financial education and I’m owning up to this. It was only recently that I discovered Fi and boy, am I glad that I did. My lack of financial education led me to a lot of bad debts.

Oftentimes, the ideas and strategies that will help us achieve financial independence are actually simple and very easy to follow.

Some of these topics that I’m sure you have some idea already even if you have not read about it yet include: how to choose the right credit card for you, side-hustles that can be done at home, how to create an effective budget, types of investment vehicles, etc.

Nowadays, it’s almost a crime not to be educated because of the existence of the internet and cheap gadgets that are capable of going online.

Education is the most powerful weapon which you can use to change the world. - Nelson Mandela Click To Tweet

What to do:

Keep yourself informed. If you are reading this then chances are, you have access to the internet. Perhaps you own a mobile phone or a laptop. All it takes is a quick Google search. Follow financial independence blogs, read about savings and investment strategies.

Try it yourself once your ready. Try to create a side-hustle, try to invest. And thank yourself a few years afterward.

Education is our biggest tool in pulling ourselves out of poverty.

Personal Circumstances and Choices We Make

Sometimes, we get into debt because of some personal circumstances that we encounter in life such as divorce. Divorce is not only costly, but it can also be an emotionally draining situation for both parties.

Our choice of school when we go to college could also put us into a huge debt. I remember discussing this with some of my closest high school friends. We were encouraging one of our friends to go to a public university so he could go to college.

But he opted to not study at all because he couldn’t afford to study at the university that he wanted to go to. I opted to go to a public university because I and my parents could not afford to pay the tuition of private schools.

Even our simple choices in our daily life could put us into a huge debt. When I was still working, I hate commuting every morning so I always opt to take a Grab or Uber ride to go to the office which is really not that far from where I used to live.

Since it’s rush hour every morning and in the afternoon, I always end up paying for the surge fees of those services.

Looking back, now that I am a little bit aware of the financial impact of my decisions in life, the cost of my Grab or Uber ride actually accounts for around 15% of my daily income (which is a lot because my monthly income during that time is really high).

It’s a lot of money that I could have saved if only I prioritized practicality over convenience.

Chains of habit are too light to be felt until they are too heavy to be broken. - Warren Buffett Click To Tweet

What to do:

There are certain situations in life that we always find ourselves unprepared for. In situations wherein we will have to split our financial resources between us and our partner, try to negotiate.

Try to arrive at a certain amount that is fair to both of you. This will minimize the impact that it could have on your financial life.

When making choices in life that has a direct effect on our finances, try to find cheaper options or alternatives. Like for example, during those times, I really hated commuting.

Would it have been more practical to carpool with friends who work in the same location? In that particular situation, I should have really prioritized practicality over convenience.

Being Financially Unprepared: Not Having an Emergency Fund

I only know a handful of people who has an emergency fund. And I know that it should not be an excuse not to have one.

Now that I have experienced being in a situation outside my control (like being lockdown due to the COVID 19 pandemic), how I wish that I have a sizable emergency fund that could have helped me live through this without incurring any debt.

Never spend your money before you have it. - Thomas Jefferson Click To Tweet

What to do:

If you are like me who is new to FI, it’s not too late to start building your emergency now my friend. Start by tracking your expenses and create a decent budget for you and your family.

Sometimes, despite being the most frugal person in the world, the reason why we can’t save is that our salary is simply not enough. It can be due to a lot of reasons such as living in an expensive city, being under-employed, etc.

Consider learning a thing or two that can help you create another source of income.

These are just some of the main reasons why people get into debt. Did you get into huge debt in the past? How did you pull yourself out of the debt? Feel free to share your tips and recommendations in the comment section below.