Top Ten Ways to Get into Debt (Part 1)
Posted by John Draper | Filed under Debt Traps
Often when people meet me out and about, they want to talk about the show. The people I meet often fall into one of three categories:
- The “That’s Me You’re Talking About” people who see themselves reflected in the families on my show,
- The “I’m following the Gail Rules now” people who are using the show as a series of lessons to get themselves back in the black, and
- The “How’d they get themselves in such a mess” people who can’t conceive of spending more than they make, or having all that debt.
The people in the first and second group know exactly how they got into a mess. For the people in the third group, here are my Top Ten Ways to Get into Debt – Part 1, so you don’t end up falling into the trap too.
#1 No Money Management Skills. That’s right, money management is a skill and unfortunately a lot of us are missing it. Each day we fly by the seat of our pants, hoping that things will turn out okay. Some days they do. Many days they don’t and we then run around fire-fighting to stay afloat. If you don’t know how much money you make, how will you know how much money you can spend? If you merrily charge whatever you’re buying on your credit card, but you don’t know how much you have to spend, how will you pay off that credit card when the bill comes in? A lack of money management skills is, perhaps, the biggest predictor of financial failure. All the credit counseling, all the bankruptcies, all the income in the world isn’t going to save your butt if you don’t take the time to figure out how to use what you’ve got to your advantage. There are rules to follow, work to put in, and self-control to be applied. It’s much easier to simply whine, “I can’t” and go happily on shooting yourself in the foot.
#2 Underemployment. Some people are just born lazy, y’know. I’ve worked with more than one person who thinks that earning $14 an hour for 37.5 hours a week is just fine. Bringing home just over $400 a week is fine, if you’re prepared to live on $400 a week. But most people aren’t. They want to buy beer, they want to watch movies, they want to have cell phones and premium cable and everything else their pals have. Sometimes when I tell these people to go Make More Money, they complain that it’ll take away from their Mommy or Daddy jobs. Ya know what? That’s an excuse for not wanting to work harder since many of those same people spend hours a day doing stuff that doesn’t involve their kids. THOSE are the hours you should be spending Making More Money.
#3 Income Goes Down, Spending Doesn’t. People get laid off from work. People get sick. People stay home to raise their children. Their incomes go down, sometimes waaay down, but their spending doesn’t. They use their credit cards, lines of credit and overdraft protection to fill the gap and then say they are surprised to find they are buried in debt. Then they get a consolidation loan or wrap the consumer debt up in their mortgages and go out and do it all over again. Of course, these same people could have built themselves a buffer against changes in their financial circumstance, except for Reason #4.
#4 No Savings. We seem to have developed an aversion to saving. We use the excuse that we can’t get much return on our money right now, so what’s the point. Ha! Talk about JUSTIFICATION! Wow! We’ve watched the savings rate plummet over the past three decades, hitting the negatives. How can that ever be a good thing? Of course, if we were willing to live on a little less now so that we’d have a cushion set aside in case we lost our jobs, we wouldn’t be pushed into Debt Hell quite so quickly. And if, knowing we were going to take time away from work to raise kids or go back to school, we set aside some money to see us through our future plans, we wouldn’t dig ourselves a tunnel to Debt Hell. And with three to six months’ worth of Essential Emergency Expenses in the bank, getting sick wouldn’t also make up financially ill.
#5 Getting Sick. Some people believe they will never get sick. It’s why people don’t bother to get critical illness insurance, disability insurance, or life insurance. In my mid-40’s I had to deal with the death of my best friend from cancer. She was in her 40s. And before Cookie died, she had years of dealing first with MS and then with breast cancer and finally brain cancer. It was horrible. If she hadn’t had insurance, she would have been totally screwed. As it was, every month was a challenge financially. And believe me, she didn’t need any more aggravation. Of course, you may not be the one to get sick. It may be your partner, at which point you better have some money to help pay for the things (s)he used to do. Or it may be a child or an elderly relatively that causes you to lose time off work.
These are the first five reasons why we go into debt, and they are the most obvious. Tomorrow: Reasons #6 – #10, the less obvious reasons.
Bookmark: del.icio.us Digg StumbleUpon
October 22, 2008 at 10:13 am
nice post and look forward to part 2
Im confused why people in Canada need health insurance? isnt it all free?
I live in the US and I couldnt imagine paying about $500 a month for regular health insurance plus $1K out of pocket deduction per year at this time for just me and Thank God my kids get lower rate insurance through the state.
I don’t know I am making excuses or refusing to buy into a corrupt system?
October 22, 2008 at 10:13 am
sorry that should say “am I making excuses…”
October 22, 2008 at 10:23 am
Hi s.r. I would like to respond to your health insurance question. Yes we here in Canada get some of medical covered by our provincial medicare i.e. going to the doctor, having a baby, some treatments etc. but others are not covered by our province and are extremely expensive. Medication is not covered by the medicare and neither are things like physio therapy etc. therefore we need additional coverage to cover this type of stuff.
As well I belief that Gail is speaking about lost wages if we cannot work during illness, this is not covered by the province so we need some type of coverage to continue to bring some sort of income into our household to keep things running.
October 22, 2008 at 11:32 am
Excellent post, Gail. I don’t think people realize just how easy it is. Yesterday I went to the bank to close my account (I had opened up a no-fee chequing account at another bank with triple the interest, so why pay to keep the old one going.) While I was at the bank, the teller offered me a credit card worth $25,000 – with a 20% interest rate. Even though I was there to CLOSE my account. I have thankfully learned how to live within my means, but for someone with problem number one (no money management skills) it is unbelievably easy to acquire enormous debt and get screwed financially.
October 22, 2008 at 11:42 am
If you have ever had to use the insurance you will never question its necessity every again! As a store manager I would be baffled by staff who chose to opt out of the generous (and reasonable) insurance coverage offered by our company. They did not have coverage through a spouse and would adamently insist that they would have the money available if there was an emergency. (They rarely did and would forgo dental appointments etc due to lack of funds)
It does not take much for expenses to add up and drain your EF – a friend of mine stepped into a small indent on the soccer field and twisted his ankle and jolted his back – in less than a week over $500 was spent on a minor injury (not counting a couple of days off work) simply from an ambulance ride, 2 chiropractor appointments, a set of crutches and a prescription. He was glad to know the money would be paid back by insurance before his credit card payment was due!
October 22, 2008 at 12:30 pm
S.R.,
Basic health care is covered in Canada. Things like routine dr’s appts, some referrals, tests, etc. Even some non-basic stuff is covered like MRI’s and some surgery, but the waiting times can be horrendous (it seems everyone has a different experience).
But, things like dental, glasses, long-term disability, physio, meds, chiro, prosthesis, travel health insurance, etc. aren’t always covered. And not all company sponsored plans are equal, some people top up with personal plans.
I can’t imagine paying $500/mo either, although I’m sure that’s not uncommon. My combined provincial health, critical illness, long-term disability and life insurance comes to $85/mo and that covers most things for a family of 4. Some things you have to top up, and that’s why we also pay into my husband’s plan.
October 22, 2008 at 1:02 pm
I myself spent literally thousands of dollars out of pocket in the brief time (a matter of months) I spent between graduate school and getting a job. I had dental work that I needed that cost thousands, and then had to shell out for a combination of chiro/physio/osteo/massage, etc that I used to treat a chronic back problem, plus medication.
But yes, I think Gail is actually speaking of insurance intended to cover you when you suddenly have a disability or illness that prevents you from working. I work for a health charity and I know how much our clients suffer while trying to apply for disability payments. It takes years, and it’s very restrictive. I don’t know how some of them do it.
October 22, 2008 at 1:51 pm
That post gave me shivers. The worst-case-scenario kind of stuff that we are all trying to not think about. ALAS we do need to think about it and prevent the “debt hell” that could easily happen. Your words resound a cautionary bell, and anyone who ignores this does so at their own peril!!!!
October 22, 2008 at 2:33 pm
I don’t think #5 can be underestimated! I treat people who have been in motor vehicle accidents (like cancer, everyone thinks these happen to someone else), and although some insurance pays “income replacement benefits” it maxes out at abour $400 per week unless you pay extra each month to increase that amount. I would be in big trouble if my income was reduced to that amount, especially when out of pocket costs could increase (i.e., meds, equipment etc.). Hence, despite the fact that my husband called me paranoid, we got life insurance and disability insurance as soon as I started working. I have seen too many people who have enough to deal with with their health concerns, and then financial concerns compound their stress. Debt hell is even worse when you are so injured or sick that you can’t go out and make more money!
October 22, 2008 at 3:23 pm
I am so glad you wrote this. In a matter of 2 years I went from being a healthy, paying off my university while I attended full time student and employee with no debt…to a new mom and found out I had cancer. It really threw me for a loop, with all the appointments and stays in the hospital I just wasn’t physically or emotionally ready to go out and find that starting job and shell out for daycare, that would ended up being sportatic. 4 years later (and cancer free) we are starting to pay back all the debt…life can change so fast
October 22, 2008 at 3:41 pm
Erin i am so happy to hear you are now cancer fee
My question is that i have a daughter whos 22 and out of university. At the moment she works at a job that does not offer health plans and she is no longer covered under my husbands. What can we get for her. It scares me that shes without it when weve always have insurance on all the kids before.
October 22, 2008 at 3:47 pm
sorry the kelsey post was from me sandram it was still under my daughters email.
October 22, 2008 at 5:29 pm
Sandra, I was in that non-insured place between university and my first job with health coverage. In Alberta I was able to sign up with Alberta Blue Cross at very reasonable rates. Most people will only need the most basic package that they offer. When I got my job, Blue Cross made it easy to cancel my coverage with no extra fees.
October 22, 2008 at 5:39 pm
@ Sandra – I lived for about a year between university and a job with insurance. During the first year, I learned that there were stuff that could be covered by insurance but I could learn to live without. For example, I learned to live without my contact lenses, and I learned that wearing “old-fashioned” glasses would be just fine. On the other hand, your daughter might want to consider putting away some of her earning for medicial emergency. Think about it — even your employer might offer insurance, part of the cost would be coming from your pocket anyway. So, just put away a small amount of money as if you had an insurance.
Sandra, I’m curious what what sort of job your daughter has. I had worked for a temp agency for a few years. While I worked for the agency I was covered by an insurance…. I didn’t think I would be covered!
October 22, 2008 at 5:56 pm
Angela and Amanda thanks for the response.
Angela shes a waitress at a wing place. Great money and shes great at saving her money also. Ill never forget when my parents took all of us on a cruise and my 3 kids aged 10 12 14 had a paper route and they all saved and took $100.00 US each to spend. In the gift shop my daughter said she wanted something and i said well then buy it and she said you mean i have to use my own money and when i said yes she decided she didnt want it anymore. Now at ages 17 20 and 22 they all have savings no credit card and my eldest put herself thru university by working her butt off since she was 14 only allowing us to pay for her books. Teaching your kids about money early really does pay off for them for their future.
I think im going to look into blue cross in ontario. Thanks again to both of you.
October 22, 2008 at 5:56 pm
I would just like to also mention, s.r., that our health care in Canada is not “free”. We pay for it through taxes. In our case, the idea is that all that pooled money takes care of the basic health care needs of everyone, but you could still get nailed by the expenses that aren’t covered.
Like many others here, I have already discovered not to take being well and able-bodied for granted. I blew my knee while performing, and was out of commission for regular work for almost a year ( I have a very physical job, but was lucky to be able to move to desk work while I recovered from surgery). It was such a wake-up call. I was lucky that WCB had me covered, but it made both myself and my husband prioritize the emergency back-up plans. That was one of those times I was very glad that we had our EF in place. We realized that we needed to get insurance in place for disability. It was sheer luck that I injured myself on the job and so had a source of insurance through WCB. How easy would it have been for that to have happened off the clock?
Now that we are expecting our first child, we have not only our life insurance in place, but our “income insurance” or critical illness in place, as well. It’s so easy for accidents to happen. And it’s so much easier to recover and heal when you aren’t sick with stress over unpaid bills, on top of everything else.
We took your advice from A Women of Independent Means, Gail, regarding the upcoming baby. We have cut down to 1.5 incomes and put the rest into savings for baby year. And we have a budget worked out for a year of reduced income. Hopefully, we won’t even need the savings. It feels great to know that we’ll be able to relax and enjoy baby’s first year… well, as much as baby lets us!
October 22, 2008 at 8:27 pm
sorry i misunderstood and I seemed to have taken the discussion in another direction but thanks
October 22, 2008 at 11:00 pm
haha poor s.r. – you pose one little question and you get this onslaught of canadians correcting you! is it obvious how sensitive we are about our health care system?
October 23, 2008 at 9:24 am
Don’t apologize SR, it was a good question. To sum up:
1. Health care in Canada isn’t “free” we pay a lot more in taxes than Americans do to have it.
2. In addition Canadians usually have to pay for most medicines + many procedures/treatments aren’t covered by the free health. To cover this, most Canadians can either buy separate coverage or their employer subsidizes the cost, usually to about 80% of medicine cost / treatments not covered. This is usually between $50 – $150 a month for most families/singles, depending on coverage / participants.
3. Often touted as superior to the American model, its worth noting that Canadian wait times for procedures are quite high.
Hope this helps!
October 24, 2008 at 5:19 pm
That was a good question SR and great answer Geoff! I have had nothing but good things to say about our healthcare system including quality of care and excellent nurses and doctors. I’m also lucky enough to have excellent benefits with my employer so I hope I will never run into #5.