Why You Get Into Debt?

Having a debt is not wrong and even it’s almost impossible to live debt free. We know that there are good debt and bad debt. Most of us can not pay cash for our homes and our children’s college educations, so we borrow money from a bank or mortgage company. Those are categorized as good debts, because those are considered as investments.  Since homes usually appreciate in value, the mortgage loan you take out to pay for the home is an investment. A student loan that is taken out to finance a college education is an investment, because earning a college degree usually means that you’ll make more money over your lifetime.

In other side, there is a bad debt which some people are trapped in it. Bad debt is debt you've taken on for things you don't need and can't afford, such as go on vacation, buy a designer clothes, shoes (consumer products). Some people do not realize their bad debts until they find out that their bank account balance is zero or even minus, their credit card bills aren’t paid and bank or debt collector starts calling.

What are the reasons people get into such a big and bad debt?

Difference between Needs and Wants

Some people do not know the difference between needs and wants, they spend too much for something they want but it’s not a basic need. Needs are the things we need to live comfortably, such as food and shelter.  Wants are things that we don’t really need, but we would like to have, such as a motorcycle, earrings, a hot tub, 500 cable TV channels, a brand new luxury car, 5,000-square-foot homes in exclusive neighborhoods, lavish ski vacations, and smart phones that do everything for us.

Bad Spending Habits

Bad spending habits come from ignorance (you avoid learning about how to spend money wisely and you don’t want to change your habit), carelessness (you are lazy to care about bad debt). You know it's wrong, but you do it anyway, telling yourself “It's just once”, but you keep doing that.

Lack of Discipline

Some people lack the self-control to discipline their purchases. Others may not want to control their spending.

Lack of Contentment

Some people never feel satisfy and happy with their life. People seem to ‘need’ a lot, because of not content, greedy, or have a high level of need. Some people feel pride with their ‘not genuine’ luxury life which is based on bad debt.

Living Beyond Your Means 

Your are tempted to try the finer things in life like expensive restaurants, luxurious holidays and fancy car, but the trouble is that once you start, it’s a difficult habit to stop

Not Knowing Your Limits

Borrowing money is fine as long as you can afford to pay it back within the conditions set out by the lender.

The question now is what is the normal limit of debts that you can have? Ideally, experts say, your total monthly long-term debt payments, including your mortgage and credit cards, should not exceed 36 percent of your gross monthly income. Other experts say your rent or mortgage payment should be no more than 25% of your income (including taxes and insurance) and your credit card debt and auto financing can safely equal 10% of your annual income. If you and your spouse’s net annual income are $ 48,000, your mortgage payment, property tax and home insurance can not exceed $ 12,000 per year or $ 1,000 per month. And your credit card and auto loan payment should be limited to $ 4,800 per year or $ 400 per month.

If you don’t feel comfortable at your current level of debt, begin immediately to take proactive steps to reduce debt, such as consult a money advisor/ personal accountant, redesign your monthly spending budget, and change your spending habit.