The Negative Role of Debt in Frugal Living
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We had earlier written how involuntary psychological factor, viz., Compulsive spending impacts one’s efforts to lead a frugal living.
The next important factor that has a negative effect on frugal living is one’s debt. Although, psychology does play a role in this also, fortunately this is not something which is involuntary in nature and through concerted efforts one can come out of it.
This portion of the article deals with ‘why people fall into debts’ as a clear understanding of the same may help them in not getting into that trap.
Reasons Why People Are In Debt
A Debt is something that a person owes to another person or corporate body which can be quantified in monetary terms. It assumes importance because of the fact that when you contract a debt, the amount you have to pay back is more than the amount you had borrowed because of the peculiar capability money making further money in the form of interest. When this interest is high or when you cannot service it with your income, you become a defaulter. Because of the accumulation of this, one falls into a debt burden or trap. Debt per se is not a bad thing,but, depending upon the purpose for which it is acquired, the characteristic of goodness or badness is determined. This has to depend on the reasons why we get into the debt. So if you are in debt and you want to get out of the debt, then you must know and find out the reasons why you can fall into the debt.
Knowing the reasons as to why you are in debt is the starting point in one’s efforts to manage it and eventually come out it in a realistic manner, as if you do not know as to why you have fallen into a particular debt, either you may not come out of it, or you may fall back into it without your knowledge.
For the purpose of convenience, we can classify debts into “Avoidable Debts” and “Unavoidable Debts”. However, there is considerable amount of subjectivity in this classification, but, in the absence of any other objectively accepted categorization, there is nothing wrong in building our theme on this classification.
Avoidable Debts:
Avoidable debts are the debts that we can avoid. However, there are still many people get into the avoidable debts. Below are some of the main reasons why people get into the avoidable debts.
- Compulsive Spending: We have already dealt in detail about this and we would not further elaborate on this except to observe that this needs counseling intervention.
- Luxurious Lifestyle: Everyone dreams to have a luxurious lifestyle. However, in fact, this is another financial trap for people. Most high income and middle class people will fall into “luxurious lifestyle” financial trap. They will go out to buy their big house or vacation house by carrying new mortgage loans. They will also buy new boats or sport cars to show off their financial abilities. They still go for it and ruin all their personal finance even though they can’t really afford them.
Bad Habits: Some of the bad habits such as gambling will also make people get into a big debt.
In short, avoidable debts are more related to our self-control, characters, buying habits and money management. This is more about our internal factors.
Unavoidable Debt
Unavoidable debts are the debts that we cannot avoid. In most cases, unavoidable debts are related to those disasters and unpredictable incidents that happen in our life or we can call it unexpected expenses. Some of the reasons why people fall into debt are:
- Losing One’s Job. Many people are living out of their monthly salary or wages.. So job is very important to most people as this is the only income source that they have. When the breadwinner in a especially in a single working family loses a job, he has no choice but have to fall into loans to cover their living expenses and etc.
- Emergency Expenditure: Life is so unpredictable that emergencies can change a person or family’s life Topsy-turvy. Disasters as earth-quake, storms and other natural disasters which are unnatural can throw people homeless, result in the deaths of breadwinners and as a result the surviving member(s) might have to contract into big debts. Medical emergencies may sap one’s savings and in order to save a life one may enter into huge debts because of high medical costs.
Thus, Unavoidable debts are more about external factors and beyond our control.
Once we know as to why we are into debts and what constitutes the major portion of our debts, between the avoidable and unavoidable categories, we would be better equipped to handle them.
While we would deal in a separate article as to how to handle various forms of debts which would help you in leading a frugal life, we conclude this article by indicating the broad parameters that are in play in handling debts.
- Self-Control: Control and behave ourselves to spend money wisely. Delay gratification is another keyword for this.
- Financial Planning: We must start to gain control over our finances and plan for our future. Please always remember that planning for the future is the best solution for the unpredictable incidents in our life.
- Money Management: Controlling and managing our expenses and saving up some money for emergency fund.
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