Major Causes of Individual Debt Problems

It's important to understand the biggest reasons people fall into personal debt so that you can avoid the traps yourself. For those who are already in the quicksand trap of debt, getting yourself out will require creating a new game plan for your finances. By planning ahead and educating yourself, you'll be able to avoid financial pitfalls in the future.

Lack of Budgeting

When you don't know where your money is going, you will definitely run into trouble. Without a budget, you're blindly spending your money and crossing your fingers that you won't run out. Lack of budgeting is one of the top reasons people go into debt. To create a budget, you must first track what you're spending your money on and compare it to how much income you receive. Then you will decide where you should be allocating your money, like debt, and then cut back in areas where you should spend less, like entertainment.

Medical Costs

Unexpected medical emergencies and the ensuing treatments and procedures are one of the most common reasons people file for bankruptcy in the United States. To prepare yourself for any kind of unexpected event, such as a medical emergency, experts recommend saving three to six months of your personal expenses. While this amount may not cover all of your unexpected medical expenses, it may create the cushion you need to soften the blow of such an event.

Divorce

Although more than half of all marriages end in divorce, that doesn't make it any less expensive. According to Bankrate.com, divorce is one of the top 10 causes of debt, and is likely to put both partners into the red. Partners who can agree on the terms of the divorce may be able to avoid lawyers and hire a mediator instead, which cuts down on costs significantly by reducing your billable hours. Preparing your own documents online is another way to cut down on the financial windfall caused by divorce.

Financial Illiteracy

Not knowing why it's important to pay off your debt can lead you to spiral further and further into it---and lots of people fall into this category. Schools don't teach students about how to handle credit or how to invest, so it's no wonder that 1-in-7 Americans carries 10 credit cards. To pay off your credit card debt, pick a payoff method and stick with it. Some experts recommend using the "snowball plan" through which you pay off your lowest balance first to build up momentum for paying off the next lowest balance, until all your debt is paid off. Others recommend paying the balance with the highest interest rate first, to avoid continuing to pay the interest in the future.