Are you ready to pay off your debt but have no clue where to start?
Read the first post in my series about paying off your debt, then read through this series until you get to this post, our third in the series.
I bet you’re psyched to figure out which debt you should pay off first, but you’d be jumping ahead of yourself.
In order to completely vanquish consumer debt for good, as your new mindset states, you must first figure out how you got into consumer debt in the first place.
Without this knowledge, you can’t prevent yourself from falling into the same consumer debt trap twice.
You must examine your past and learn from the mistakes so that you don’t make them again in the future.
There are two major ways most people get into debt. The first is a major life changing debt event and the second is through simple money sinkholes, which I’ll explain in the next installment of our series.
For now, let’s take a look at some major life changing debt events that could have caused your debt.
Look In The Past For Life Changing Debt Events
Not all debt is due to overspending and consumerism, but that doesn’t change the fact that you want to get rid of it. There are a few times you can have life changing events that put you in serious debt that you never expected to incur.
Take a look back in your past and see if you can find any of these life changing, debt incurring events.
Higher Education and Student Loans
The first life changing event was the one my wife personally experienced. She ended up with over $80,000 of student loan debt.
Going to college and taking out student loans can leave people in a pretty serious debt situation, much like the one we were in. You can graduate debt free if you really put your mind to it, but the past is the past.
To avoid incurring too much student loan debt in the future, don’t let yourself or any family members go into more debt than they can afford.
You need to calculate this based on their post college career path. Make sure you have a solid plan to pay that debt off once you achieve your educational goals.
Medical Bills – With or Without Health Insurance
Another horrible, life changing debt event happens more often that we’d like to think. A simple medical problem can easily put someone with or without health insurance into thousands or tens of thousands of dollars of medical debt.
Even though you can normally negotiate the bill down or set up interest free payments, this debt can be soul crushing.
The best way to avoid going into a huge amount of medical debt is to protect yourself and your family with health insurance. Add in a decent emergency fund and you should be well covered.
Death Of A Loved One Without Enough Life Insurance
If medical debt wasn’t bad enough, you can get into even worse financial trouble should someone in your family pass away.
In addition to dealing with the final arrangements of your family member, you’ll now have to learn how to live on less. A big chunk of income could have disappeared and you’ll still have the same bills and debt to pay off.
The best way to prevent going further into debt in this situation going forward is to make sure that you have enough life insurance so that your financial life won’t be a struggle if something should happen to your loved ones.
Divorce is another nasty debt inducing event many people face. Splitting up from your significant other can get nasty in a hurry and can leave you with more debt than you can handle on just your income alone.
You could have been forced to take out a larger mortgage to pay you ex-spouse their half of the equity in your home. You could have been burdened with half of the credit card debt that you didn’t even know existed.
Regardless of how it happened, it is in the past. Just make smarter decisions going forward and make sure your next marriage, if you remarry, is with someone you are a better fit with in both finances and personality.
Job Loss or Extended Unemployment
Preparation is key for avoiding financial speed bumps. Most people I personally know aren’t prepared for one of the biggest financial speed bumps you can face, the loss of a job.
Unless you get a new job quickly, you’ll be burning through your cash reserves and racking up the debt very quickly after your last paycheck hits your bank account.
Few people have an emergency fund large enough to last through the difficult times of an extended unemployment spell. The best way to prevent going into debt in the event of a job loss is to have a fully stocked emergency fund of at least six months worth of expenses.
Failure Of A Business
The failure of a business is much like a job loss because you’ll no longer have an income to support yourself, but in some ways it can be much worse.
Many people throw every last penny they have trying to save a failing business and that normally includes maxing out the credit cards in a last ditch effort.
To avoid this horrible outcome, try to take a step back and evaluate your business objectively. Hopefully you’ll be able to see the writing on the wall before you incur massive amounts of debt trying to stop a sinking ship.
Accidents or Acts of God (Hurricanes, House Fires, etc)
Accidents or acts of God can be financially disastrous. Whether you’re in a car accident, are victim of a burglary, house fire, flood or hurricane, these types of events can set you back thousands of dollars easily.
If you didn’t have the proper insurance or money in the bank you might have to go into massive debt to get your life back on track.
Make sure you’re properly insured for the property you own and that you have enough cash to cover any deductibles on these policies if you want to avoid going into debt because of these events.
Short or Long Term Disability
A disability, whether caused by an accident or an illness, can either be a short term or a life long problem for your finances.
If you’re unable to work and didn’t have short or long term disability insurance your financial life could be ruined by the fact that you can no longer earn money for your family.
In the short term you could end up in a ton of debt while you’re waiting to heal before going back to your job. If you end up being disabled for a longer period of time you may never be able to recover financially.
Once again, insurance and a well stocked emergency fund can prevent the financial part of the disaster of becoming disabled. We’ve dealt with a couple of short term disability stints and were very glad Tori had short term disability insurance through her employer.
Prepare For These Situations To Avoid Debt
As you can see, there are many times when an unexpected life event can throw you tens of thousands of dollars into debt if you aren’t well prepared with proper insurance and a well stocked emergency fund.
Do your best to prepare for the worst case scenarios. By doing so, you will have eliminated many of the threats to your debt pay off journey.
The next step, which we’ll cover next Monday, is taking a look at money sinkholes and how they can put you in the same horrible debt that these life changing debt events can.
Once you understand all of the ways how you’ve gotten yourself into debt you can protect yourself against it happening again. You’ll be well along your way to paying off your consumer debt once and for all!
Have you experienced any of these awful life changing debt events? If so, did you end up in debt or were you well covered by insurance and an emergency fund?