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7 Types of People Who Can’t Avoid Debt

7 Types of People Who Can’t Avoid Debt

Living in a first-world country has a lot of perks and being able to buy things you can’t immediately afford is a big one. Taking out loans and acquiring a bit of debt is an essential part of life. In an ideal world, people would use credit for major, life-altering purchases like a house or a car and then pay off the debt within the next few years. However, this idealistic scenario hangs on the assumption that people are incredibly responsible and will be able to create an effective budget and stick to it, even if it means not being able to afford all the pretty, shiny things that they want. There are people out there who just can’t seem to avoid debt; they seem almost drawn to it. If you want to avoid becoming one of them, you need to understand what it is that causes problems with credit.

1. People whose buying decisions are influenced by others

The type of person that is most likely to accumulate debt is one who is unsatisfied with his life and always looks to others with envy.  These people falsely assume that if they buy the same things and live the same lifestyle as someone they admire, they will somehow be respected and achieve a sense of fulfillment. Just because the Johnsons from down the street have a Mercedes parked in their driveway doesn’t mean that you have to go out and get one, nor do you need some of the high-tech gadgetry and jewelry they flaunt at local parties – particularly if all these things are well above your pay grade. In order to avoid becoming this type of person you’ll need to sit down with your significant other or family members and have constructive discussion about what you can do to feel comfortable in your own skin and how much you can actually afford to spend on various items. There are a number of self-help books and motivational videos out there that will help you come to terms with your finances.  You need to realize that respect and happiness aren’t synonymous with owning a bunch of high-end equipment and expensive clothes.

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2. People who are impulsive buyers

Excited Shopping Woman

    Some people just don’t seem to have any self-control whatsoever. They will walk around the mall like  little squirrels gathering nuts for the winter, turning their heads at every “Sale” sign and stopping at every shop window. It doesn’t matter whether they need an item or not, they will buy a new blender, rowing machine, tablet or purse, simply for the thrill of it. Now, there is nothing wrong with going on an endorphin-inducing shopping spree every now and again, but impulsive buyers will accumulate large amounts of debt by constantly buying impractical items they don’t really have a use for, or even useful items that are way out of their price range. Knowing your priorities and being realistic can help you avoid using credit to make impulsive purchases. When you get an urge to buy something, take a moment to breathe and remind yourself that your finances don’t allow that type of purchase right now. Write some of those expensive, pretty things down in your wish list and quench your thirst for shopping by buying some inexpensive trinkets.  As long as you buy something new you will get that rush of excitement you usually get from shopping; just keep it cheap and simple.

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    3. People who take random advice from others

    While your family and friends can sometimes be a true source of inspiration and offer a helping hand and shoulder to cry on, not every piece of advice they give will be particularly sound. Remember, these people are not, for the most part, experts on business and finance, and there is a good chance that they have heard a few sentences on TV or read something online a few years back and now feel qualified to give out all kinds of advice on how to avoid debt or pay it off. If you want advice on developing a good budget and getting your finances in check you need to consult professionals. When a friend or family member gives you some financial advice, just nod politely and thank them, then double check it when you get home and see if what they suggest really works.

    4. People who don’t have clear goals

    It’s a sad sight to see, but there are plenty of people out there in their early thirties acting like teenagers and focusing on game consoles, video games and beer rather than investing in their home, their children’s clothes or paying off their student loans. When you are that selfish, irresponsible and have no real ambition and clear goals it’s easy to lose sight of what’s important and continue living in an imaginary world where things like financial stability, family, responsibilities and hard-work are disregarded in favor of  trivial things. Having some kind of idea of where you want your life to go is important if you don’t want to become this type of person. Setting goals for yourself isn’t really difficult – you need one or two major goals that you want to achieve in  5-6 years and few smaller goals that can be achieved within the next year. The goals can be as simple getting in shape or paying off your car by next year, but all of this should tie in to your long-term goal, e.g. getting a bigger apartment so you can move in with your partner.

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    5. People who don’t have a savings account

    A savings account with a couple of thousand dollars on it can serve as a safety net. If an unexpected event occurs and you don’t have any money stashed away, it can end up ruining your efforts to pay of your existing debt or cause you to fall further into debt. People who have at least a thousand dollars saved for rainy days can deal with all sorts of problems and suffer much less stress than those getting by paycheck-to-paycheck. Be sure to set aside a bit of money each month – even $100 or $200 every month can be enough. Change your thinking about windfall money; your tax refund, a bonus, or a generous gift should be seen as an opportunity to build your savings, not to buy some big-ticket item you’ve been wishing for.

    6. People who don’t know how to create an effective budget

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    Girl writting in notebook

      Writing things down on paper has an incredible way of enlightening you as to where you are going wrong. You can justify all kinds of bad decisions in your head, form a distorted picture of reality and even lie to yourself about how much you spend on things that are not essential, but when the cold facts are sitting in front of you, in black and white, it’s much easier to create a plan and make the right budget cuts. Write down how much you earn – coupled with how much other members of the household earn – and make a list of your monthly expenses. You need to divide the expenses into several categories, but the most important classification is necessary, fixed expenses (car payments, rent, bills, etc.) vs. flexible expenses (food, clothing, gas, hygiene products, etc.) vs. optional expenses (video games, new hat, blender, etc.). Savings can be made on flexible expenses (avoiding overpriced name brands, buying food in bulk, using coupons and looking for good deals) while a lot of optional expenses can be cut out of the budget altogether or put on hold for a couple of months until your finances start shaping up.

      7. People who use credit for everything

      It is quite reasonable to use a credit card in some situations and take out loans when a major investment is required, but there are people who’ll make 3-5 small store runs during the day and just keep putting things on their credit cards. When you buy with cash you have a very good idea of just how much you are spending.  When using a credit card it’s easy to get carried away and forget that all those little purchases add up to quite a bit. If you want to stay debt free, consider using cash for smaller purchases or creating a list of things you need for that day and buying them all in one go. Weekly shopping runs are a great way to save money because you buy in bulk and avoid unplanned, spur-of-the-moment purchases like random snacks and drinks. Having a list prepared ahead of time will help you to get everything you need in that one trip, and will also help curtail impulse buying.

      These seven types of people can’t seem to avoid debt for many different reasons. If you want to learn how to keep yourself from accumulating more and more debt and wish to pay off your existing debt,  you will need to identify the mistakes these people make, understand why they lead to more debt, and try to avoid making the same mistakes.

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      Ivan Dimitrijevic

      Ivan is the CEO and founder of a digital marketing company. He has years of experiences in team management, entrepreneurship and productivity.

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      Last Updated on September 2, 2020

      How to Set Financial Goals and Actually Meet Them

      How to Set Financial Goals and Actually Meet Them

      Personal finances can push anyone to the point of extreme anxiety and worry. Easier said than done, planning finances is not an egg meant for everyone’s basket. That’s why most of us are often living pay check to pay check. But did anyone tell you that it is actually not a tough task to meet your financial goals?

      In this article, we will explore ways to set financial goals and actually meet them with ease.

      4 Steps to Setting Financial Goals

      Though setting financial goals might seem to be a daunting task, if one has the will and clarity of thought, it is rather easy. Try using these steps to get you started.

      1. Be Clear About the Objectives

      Any goal without a clear objective is nothing more than a pipe dream, and this couldn’t be more true for financial matters.

      It is often said that savings is nothing but deferred consumption. Therefore, if you are saving today, then you should be crystal clear about what it’s for. It could be anything, including your child’s education, retirement, marriage, that dream vacation, fancy car, etc.

      Once the objective is clear, put a monetary value to that objective and the time frame. The important point at this step of goal setting is to list all the objectives that you foresee in the future and put a value to each.

      2. Keep Goals Realistic

      It’s good to be an optimistic person but being a Pollyanna is not desirable. Similarly, while it might be a good thing to keep your financial goals a bit aggressive, going beyond what you can realistically achieve will definitely hurt your chances of making meaningful progress.

      It’s important that you keep your goals realistic, as it will help you stay the course and keep you motivated throughout the journey.

      3. Account for Inflation

      Ronald Reagan once said: “Inflation is as violent as a mugger, as frightening as an armed robber and as deadly as a hitman.” This quote sums up what inflation could do your financial goals.

      Therefore, account for inflation[1] whenever you are putting a monetary value to a financial objective that is far into the future.

      For example, if one of your financial goal is your son’s college education, which is 15 years from now, then inflation would increase the monetary burden by more than 50% if inflation is a mere 3%. Always account for this to avoid falling short of your goals.

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      4. Short Term Vs Long Term

      Just like every calorie is not the same, the approach to achieving every financial goal will not be the same. It’s important to bifurcate goals into short-term and long-term.

      As a rule of thumb, any financial goal that is due in next 3 years should be termed as a short-term goal. Any longer duration goals are to be classified as long-term goals. This bifurcation of goals into short-term vs long-term will help in choosing the right investment instrument to achieve them.

      By now, you should be ready with your list of financial goals. Now, it’s time to go all out and achieve them.

      How to Achieve Your Financial Goals

      Whenever we talk about chasing any financial goal, it is usually a two-step process:

      • Ensuring healthy savings
      • Making smart investments

      You will need to save enough and invest those savings wisely so that they grow over a period of time to help you achieve goals.

      Ensuring Healthy Savings

      Self-realization is the best form of realization, and unless you decide what your current financial position is, you aren’t heading anywhere.

      This is the focal point from where you start your journey of achieving financial goals.

      1. Track Expenses

      The first and the foremost thing to be done is to track your spending. Use any of the expense tracking mobile apps to record your expenses. Once you start doing it diligently, you will be surprised by how small expenses add up to a sizable amount.

      Also categorize those expenses into different buckets so that you know which bucket is eating most of your pay check. This record keeping will pave the way for cutting down on un-wanted expenses and pumping up your savings rate.

      If you’re not sure where to start when tracking expenses, this article may be able to help.

      2. Pay Yourself First

      Generally, savings come after all the expenses have been taken care of. This is a classic mistake when setting financial goals. We pay ourselves last!

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      Ideally, this should be planned upside down. We should be paying ourselves first and then to the world, i.e. we should be taking out the planned saving amount first and manage all the expenses from the rest.

      The best way to actually implement this is to put the savings on automatic mode, i.e. money flowing automatically into different financial instruments (mutual funds, retirement accounts, etc) every month.

      Taking the automatic route will help release some control and compel us to manage what’s left, increasing the savings rate.

      3. Make a Plan and Vow to Stick With It

      Learning to create a budget is the best way to get around the uncertainty that financial plans always pose. Decide in advance how spending has to be organized

      Nowadays, several money management apps can help you do this automatically.

      At first, you may not be able to stick to your plans completely, but don’t let that become a reason why you stop budgeting entirely.

      Make use of technology solutions you like. Explore options and alternatives that let you make use of the available wallet options, and choose the one that suits you the most. In time, you will get accustomed to making use of these solutions.

      You will find that they make it simpler for you to follow your plan, which would have been difficult otherwise.

      4. Make Savings a Habit and Not a Goal

      In the book Nudge, authors Richard Thaler and Cass Sunstein advocate that, in order to achieve any goal, it should be broken down into habits since habits are more intuitive for people to adapt to.

      Make savings a habit rather than a goal. While it might seem to be counterintuitive to many, there are some deft ways of doing it. For example:

      • Always eat out (if at all) during weekdays rather than weekends. Weekends are more expensive.
      • If you are a travel buff, try to travel during off-season. You’ll spend significantly less.
      • If you go shopping, always look out for coupons and see where can you get the best deal.

      The key point is to imbibe the action that results in savings rather than on the savings itself, which is the outcome. Focusing on the outcome will bring out the feeling of sacrifice, which will be harder to sustain over a period of time.

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      5. Talk About It

      Sticking to the saving schedule (to achieve financial goals) is not an easy journey. There will be many distractions from those who are not aligned with your mission.

      Therefore, in order to stay the course, surround yourself with people who are also on the same bandwagon. Daily discussions with them will keep you motivated to move forward.

      6. Maintain a Journal

      For some people, writing helps a great deal in making sure that they achieve what they plan.

      If you are one of them, maintain a proper journal, where you write down your goals and also jot down the extent to which you managed to meet them. This will help you in reviewing how far you have come and which goals you have met.

      When you have a written commitment on paper, you are going to feel more energized to follow the plan and stick to it. Moreover, it is going to be a lot easier for you to track your progress.

      Making Smart Investments

      Savings by themselves don’t take anyone too far. However, savings, when invested wisely, can do wonders.

      1. Consult a Financial Advisor

      Investment doesn’t come naturally to most of us, so it’s wise to consult a financial advisor.

      Talk to him/her about your financial goals and savings, and then seek advice for the best investment instruments to achieve your goals.

      2. Choose Your Investment Instrument Wisely

      Though your financial advisor will suggest the best investment instruments, it doesn’t hurt to know a bit about the common ones, like a savings account, Roth IRA, and others.

      Just like “no one is born a criminal,” no investment instrument is bad or good. It is the application of that instrument that makes all the difference[2].

      As a general rule, for all your short-term financial goals, choose an investment instrument that has debt nature, for example fixed deposits, debt mutual funds, etc. The reason for going for debt instruments is that chances of capital loss is less compared to equity instruments.

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      3. Compounding Is the Eighth Wonder

      Einstein once remarked about compounding:

      “Compound interest is the eighth wonder of the world. He who understands it, earns it… He who doesn’t… Pays it.”

      Use compound interest when setting financial goals

        Make friends with this wonder kid. The sooner you become friends with it, the quicker you will reach closer to your financial goals.

        Start saving early so that time is on your side to help you bear the fruits of compounding.

        4. Measure, Measure, Measure

        All of us do good when it comes to earning more per month but fail miserably when it comes to measuring the investments and taking stock of how our investments are doing.

        If we don’t measure progress at the right times, we are shooting in the dark. We won’t know if our saving rate is appropriate or not, whether the financial advisor is doing a decent job, or whether we are moving closer to our target.

        Measure everything. If you can’t measure it all yourself, ask your financial advisor to do it for you. But do it!

        The Bottom Line

        Managing your extra money to achieve your short and long-term financial goals

        and live a debt-free life is doable for anyone who is willing to put in the time and effort. Use the tips above to get you started on your path to setting financial goals.

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        Featured photo credit: Micheile Henderson via unsplash.com

        Reference

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