While a gargantuan number of Americans handle their finances reasonably well, there are 10 dollar destroyers floating around, wherein some consumers fall victim to their own personal financial mismanagement or find themselves in circumstances possibly out of their control.
The secret to successfully navigating around these ten hazards to the health of your wealth is identifying them, understanding them, and forming an action to deal with them. Check out the embedded links to resources to guide you through this maze.
I. Easy Credit
Since the last recession interest rates declined sharply, though creeping up more recently. Credit card issuers and other non-bank lenders returned over the past decade to offering generous credit lines to anyone with a heart, phone and hopefully a job. However, most of this borrowing is pegged to the prime rate, and carries a high spread of 19 percentage points or higher over the current prime rate. When credit card rates go up to 30%+, many consumers get caught in a major budget squeeze.
Furthermore, lending to consumers with lower credit scores “subprime” (under FICO 660) has taken off over the past five years. However, these easy loans to consumers, with low credit scores, more than likely carry not only high interest rates but also monthly, annual or both fees.
After years of financial austerity and stagnation among consumers, many needed bigger housing or needed to replace their cars and furnishings. This, along with credit easing, created an avalanche of new credit card accounts and consumer loans. Years of low interest rates have only fueled the fire. Now that rates are going up, consumers may find themselves increasingly pinched by higher payments across-the-board.
II – Medical Expenses
An unexpected, serious illness can wreak havoc on a family’s finances. The cost of good health care, even with insurance, is very expensive. Large deductibles, co-pays, and high out-of-pocket caps can set the stage for extreme financial difficulty. This is not including the impact on income of not being able to work or time spent caring for a loved one.
Currently, the resistance to expand Medicaid and/or destroy Obamacare is only going to make matters much worse for millions of American families.
Someone faced with rising medical debt will often turn to credit cards to pay medical bills or to get by when income suffers. Paying for prescriptions is necessary, and with drug costs spiraling upward, sometimes using credits cards to pay for them is the only answer.
Consumers who have high medical bills, especially with hospitals, should do their best to negotiate their balance down and get on a payment plan they can handle. Hospitals and providers are generally willing to work with those struggling with large medical bills.
III – Rising Expenses
Under the current U.S. regime the cost of consumer goods are set to rise quickly as trade wars with other countries escalate. The most recent “Trump Tariffs” on Chinese goods and parts will impose a 25% tax on American consumers. So consider buying major items, like appliances, affected by the tariffs, as soon as possible.
As the economy improves, the cost of big-ticket items and the interest rates consumers pay to finance them will go up. This includes autos, household furnishings, student loans, and other necessities. In addition, the cost of housing will increase across the board, whether you are renting an apartment or buying a house. Add that to the normal cost of living items such as food and entertainment and income growth may be eclipsed once again.
Consumers may find themselves in housing they can no longer afford but unable to foot the cost of a move. Alternatively, they may have a student loan they can no longer make the payments on, as many of these loans have variable rates. If consumers face high credit card balances, even the minimum payments will rise as interest rates go up. This makes it increasingly difficult to stay current. With nowhere else to turn, many will turn to additional credit cards to get by.
IV – Divorce
While divorce is not in vogue these days, declining to 40-year lows, it is considered the most devastating to American wealth. Many realize it’s “Cheaper to Keep Her.”
The rate of marriages has also declined, but only because many are waiting until later to get married. Those who marry later tend to stay married as opposed to those who get married before the age of 25.
Economic factors play a key role in the divorce rate, as lower income couples tend to divorce more often than their higher income counterparts do. In addition, those with a college degree tend to stay married longer than less educated couples do.
So, even though the divorce rate has declined, the financial impact of divorce has not gotten any less severe. Many times, couples are already in financial trouble to begin with, and divorce only makes things worse. Moreover, single parents struggling to make ends meet on one income will sometimes have no choice than to turn to credit cards to get by.
V – Insufficient Savings
One of the biggest reasons consumers fall into credit card debt is that they have little to no savings to fall back on. Therefore, if they lose their job or even just have a reduction in available hours, they are unable to make ends meet. Throw in the occasional, unexpected purchase, such as a new refrigerator or car repair, and they are relying on credit cards to pay the bills or foot the expense.
Consumers should budget to contribute something to savings every month. If they cannot afford to save on a monthly basis, they should look to reduce expenses or bring in additional income to fund their savings account. Sometimes, getting rid of unused items through a garage sale or online auction can provide a good jumpstart for a savings account.
Consumers who find themselves in credit card debt should be actively looking for ways to reduce it and eventually pay it off entirely. There are a number of ways to approach paying off credit card debt and, while some are faster and easier than others are, each has its own set of benefits and downsides.
Sometimes, a debt relief company such as National Debt Relief can help consumers settle their debt with credit card companies. This involves closing credit card accounts and directing payments to an escrow account in the consumer’s name. Once you reach a predetermined amount of money, the debt relief company will begin negotiating with your lenders.
VI – Unemployment
When someone loses a job, the financial result can be devastating, especially if that person was the head of a one-income family. Depending on the circumstances, income may stop immediately, leaving a family scrambling to pay for housing and food. If there is help available, such as unemployment compensation, it is usually far less than what is necessary to make ends meet. At this point, families have no choice but to depend on credit cards.
When times are tough, any job is better than no job at all. If a family is desperate for income, the breadwinner may take a job that pays far less than the one lost. Americans accepting a lesser job, or being underemployed, has been a very prevalent circumstance in the last few years, as the job market has remained stagnant. While there is sometimes no choice, underemployment can lead to a mountain of credit card debt as consumers use them to make up the income shortfall.
VII – Cost of Living
For the better part of the last decade, income growth has been very sluggish, if not flat, in most parts of the country. When income growth is stagnant, consumers cannot keep up with the rising cost of living and have to rely on other ways to make ends meet. Usually, this means utilizing credit cards just to meet everyday expenses. In addition, compounding the problem further, families are unable to save money for emergencies, much less for vacations and special events.
Additionally, child care expenses for working parents can often offset take-home pay nearly entirely, causing the income-to-expense ratio to degrade even further. Working parents who don’t have family to rely on to help fill the childcare gap find themselves in an impossible situation where picking up extra income through an extra job or working longer hours does not do much to increase income.
VIII – Poor Management
Many Americans struggle with poor money management skills. Most high schools and colleges teach little to no financial knowledge or skills to their students. Most graduates go out into the world with no ability to manage money at all. Compound this with the staggering student loan debt many young people are carrying, and a stagnant job market, and the problem becomes clear.
Credit cards are an accessible method of bridging the gap between income and expenses. Without adequate income, many people are dependent on credit cards to get by. Better solutions involve getting a second job to increase income and making a concerted effort to decrease expenses.
Many online resources exist to help those with poor money management skills learn to create a budget and stick to it. Websites such as Mint offer budgeting instruction, monetary advice, and many other tools to help.
IX – Gambling Problems
Gambling addictions are major dollar destroyers. The financial impact of someone with an addiction to gambling can be profoundly devastating, as the ability to lose a lot of money in a short period is possible. Today, gamblers can place bets over the Internet using a credit card. If the problem is serious enough, sizable sums of debt can accumulate in a very short period. Often, it will only stop when the addicted individual runs out of credit and the family or individual is in financial ruin.
Those with gambling problems should seek help from one of the many non-profit organizations available. Families and loved ones can also seek counseling to cope with the addicted person’s behavior and its impact on everyday life.
X. Drug Addictions
When drug addiction strikes a family, it can be devastating in many ways. Aside from the emotional strain and difficulty it can cause, especially in a marriage, it can have serious financial implications. Those suffering from drug and alcohol addiction cannot prioritize things ahead of their needs, meaning even rent or food money is fair game when it comes to fulfilling their addiction.
Opioid and heroin are serious problems in the U.S.
The legalization of cannabis in many states has not produced any strong evidence of wealth destruction or widespread addiction. However, it can become a budget buster, as it is relatively expensive.