Living in a debt cycle can be one of the most frustrating things for people who are working hard to live financial free. You work hard to pay off debt and before you can blink you’re in debt again.
So what causes a debt cycle, anyway?
Even if you hate debt and try to avoid it, you might encounter the debt cycle under the following circumstances:
- You pay off your student loans, but decide to take out a loan for another degree.
- You encounter medical bills you don’t have the cash to cover.
- You pay off your credit cards each month, but you got careless one month and spent more than you could reasonably pay off in the current month or in the months to come.
- You decide to buy a washer and dryer with a special 0% financing. Here’s the deal on these: you’re getting 0% because you’re paying top price for the product.
- You didn’t have enough car savings, so you had to take out a loan to get a replacement car.
- You decided to take out a home equity loan to install your new pool.
Do any of these situations sound familiar? As I said, even the most astute personal money managers can find themselves in the debt cycle which quite frankly, could be never ending if you’re not careful.
The problem with such a cycle is never really reaching the point in your life to gain complete financial freedom. Sure, you might have built some wealth and even have cash savings, but in my opinion, you’re never truly free if you owe something to someone.
So, how do you avoid a debt cycle?
Consider the following tips:
- Only go back to school when you know you have the cash to pay for it. That may seem extreme to some of you, but you have to make a choice, don’t you? You’ll either choose to be in debt and more educated, or debt free and position yourself to be open to more opportunities. Rather, start paying off your student loans and promise to never get new loans again.
- We can’t predict medical expenses. They are a fact of life. But, we can be prepared for them and the best way to do that is to buy as much medical insurance as you can afford (especially for those who are in higher risk situations), contribute to a Health Care Flexible Spending Account to save money on medical expenses, and finally, have a well established emergency fund to protect you from the expenses your insurance can’t.
- There isn’t much to say for credit card or 0% financing expenditures other than to avoid them. In fact, these are probably situations in which you have most control of. Just say no!
- I think one of the leading causes of the debt cycle is car debt. You have to save money for a car if you want to avoid this cycle and you have to pay cash for replacement cars. It may seem like an insurmountable goal, but it can be done!
- As with credit card spending, your home equity loan is also your choice. While you might feel like you’re investing in your home with such expenditures as a pool, deck, etc., you still owe something to someone at the end of the day. Wouldn’t you rather be financially free? Again, it’s your choice here!
As you begin to pay off debt, remember the debt cycle. Why would you put forth all that work to end up right back where you started? Again, some circumstances are beyond our control, but we can certainly take some preventative measures as described in this post. Most of these decisions are within your control!
Have you encountered the debt cycle?
{ 8 comments… read them below or add one }
Its really a shame how many people die and have never had a debt free adult life.
I was. Or shall I say “we” were. Our weakness was cars and trucks. Oh my, we’ve had SO many. Our friends and family never knew what we were driving because they could not keep track. We got awesome rates from our credit union that it made borrowing SO easy. We paid off many of the cars super fast. Even swapped a car before we even had to make a payment. It was crazy. Then one day, I decided enough was enough.
All the money we used to pay off the cars could have put a serious dent into our mortgage. Ugh! What a waste to invest in items that go down in value such as vehicles.
Currently our vehicles are paid off and we’re sticking with them. So far so good. I want to put a dent in our mortgage!
I would fall into the Medical expenses category because I have had a lot of medical issues the last few years. But I do have the FSA account and it helps soooo much. But the last few months of the year is a doozy because the money saved in the account is gone. I cannot risk adding more because if you don’t use it you lose it.
ITs going to hurt after the first of the year with the law changing about OTC medications with FSA accounts. Most of our meds are OTC’s. So that will be worked into the budget.
I will say this, a couple of years before I took the leap to take control of my finances I would not know what to do in situations I have recently encountered. So I am glad for the knowledge of learning how to eliminate debt and take control. Although I wish I knew this stuff then.
@Melissa
It took me a few years to realize the benefit of using the FSA. But the savings drove me to learn about it. And now I can’t believe I waited so long to take advantage of it. Yes, the elimination of OTC items will hurt.
But good for you to get on track and take control of your money. That in itself is liberating.
@Contra
Yes, so true. I am hoping that I don’t fall into that category. I feel that I’ve done a good job with teaching my son good nutrition and behavior. Now I hope that I can influence his future personal finance decisions.
I came into a debt cycle; was paying off debt and got careless. Now I’m trying to be as frugal as possible and aggressively pay it down.
While I agree with most of the points here, I’m not sure I agree with the ‘tip’ to “only go back to school if you have the cash to pay for it”.
Here’s why: Some people’s debt cycles exist not because they spend too much but because they are in careers where they EARN TOO LITTLE. They’ve picked careers that simply do not pay, or that have few jobs. I know, I’m in this situation as an Artist/graphic designer. While my ‘debt cycle’ doesn’t really exist yet (I’m debt free), one small incident (an accident, a health problem) will send me spiraling into debt that I can never get out of simply because I literally have NO earning power, nor can I find employment in field (even retail jobs won’t hire me, due to being ‘overqualified’ plus the fact that retail has been hit hard by the recession).
So I’ve chosen to go back to school for a career that has a LOT of earning power and plentiful jobs: Accounting. But to do so, I have to incur debt. I can’t pay cash, because I can’t even make enough to pay basic living expenses, much less save for school. And I’m already middle-aged so waiting even longer for the money would be folly. So debt is the smartest choice here. I plan to borrow no more than $20,000 for college, which should be easily paid off once I get a job in Accounting.
So for people with super-low earning power, incurring debt to go back to college for a degree that has high earning power, could actually be a wise investment.
@XJ
Do you like accounting or are you just going to school for it for the money? I’m just curious. Not knocking you down, I swear. I kinda got into my career due to the money. But when I realized I didn’t like it, and had no desire to advance in it, well, so did the money. And now I’m stuck. Now I’m looking for something else that I have passion for and trying to find out how I can make money in that field.
While being an artist and graphic designer, is there a way to make money in a position with that background? My friend, an artist, once worked for an art gallery. I believe she did some marketing and such. It supported her so she could focus on art the rest of the time.
Personally, I am having problems with debts… But i am praying to God that I can pass this problem in the right time, and i am into disciplining myself in spending too much money greater that what can I earn. Please pray for me my dear brethren, I want to get out of these debt cycle!