Between the rising cost of living and slow wage growth, more Australians struggle to make ends meet, making the question of why people go into debt far less asked. Unfortunately, debt is becoming a regular part of everyday life. According to research by Canstar, the average Australian owes $3,841 on their credit card.
Aside from owing a lender money, debt can also hold us back from reaching our financial goals, prevent us from saving and eat into our monthly budgets. This is especially true for those with multiple debts, like car loans and credit cards.
Although it’s natural to have negative feelings about personal debt, it is nothing to be ashamed of. In fact, with the proper knowledge and resources under your belt, you can get debt-free in no time. This blog will share the five main causes of debt and how you can get on top of it once and for all.
Cause #1: Spending more than you earn
One of the major questions Australians ask themselves is how they ended up with large amounts of debt in the first place. The answer is simple: spending more than you earn. This is the most common cause of debt and often occurs when a person regularly fails to separate their needs and wants and lets their spending get out of hand.
One way to prevent this in the future is to create a realistic budget, so you know when and where your cash is going. A budget gives you an overview of your spending across specific categories, like groceries, bills and lifestyle activities.
Budget planning is an excellent tip for those who tend to let their frivolous spending get the best of them, as you’ll be able to allocate funds accordingly and won’t feel guilty about spending.
Need some help putting together the perfect budget? We’ve written a beginner's guide to budgeting over at our blog.
Cause #2: Relying too heavily on credit cards
Another top cause of debt is constantly relying on your credit card to get through the month, from purchasing groceries to paying rent. Credit cards are highly convenient and accessible, which makes them easier to use at any given moment — especially if you have a high credit limit.
But unfortunately, if you are unable to pay the balance off in full every month, you’ll start to snowball a massive balance, plus attract interest charges.
If you’re ready to get debt-free, cut up the card and stop using it for every purchase. Doing this will teach you healthy money habits that involve savings, not credit.
Cause #3: Applying for products you couldn’t afford
From car loans to home loans, sometimes we bite off more than we can chew. While it’s not uncommon to take out a personal loan to help tick off a big financial goal, many borrowers make the mistake of not shopping around — and failing to do so could land you a product you can’t afford.
When adding another product to your finance toolkit, it’s always a good idea to compare your options rather than opting for the first deal you see. This line of thinking can also be applied at insurance renewal time or if you’re thinking of switching energy providers.
Cause #4: Experiencing a financial emergency
Let’s face it; life loves throwing us curveballs — whether or not we’re ready for it. From a massive vet bill to an urgent car repair, many Australians don’t have the savings to cover an emergency and, as a result, have to resort to credit. Research from Budget Direct Home found that approximately 55.5% of Australians could not cover a $1,000 emergency.
Get ahead financially by setting up an emergency fund — this savings account can only be accessed during emergencies. There’s no strict rule on how much you should save, but it’s recommended to have at least three months' worth of living expenses tucked away.
Cause #5: Purchasing necessities
Over the last few years, Australian budgets have been tested with rising inflation rates. As a result, many households have had to seek instant funding, like pay-day loans or credit cards, just to put food on the table. Unfortunately, this way of living will eventually catch up with you, attracting massive interest charges or late payment fees.
If you are severely struggling financially, resources are available, like the National Debt Helpline — a not-for-profit organisation that helps Australians get back on their feet.
Kickstart your debt-free journey with Salt & Lime
For many Australians unable to get out of multiple kinds of debt, the challenge can be not knowing where to start. You could also struggle to keep up with other expenses with multiple monthly repayments debited from your account. If this sounds like you, a debt consolidation loan could be the ideal solution.
A debt consolidation loan is a type of personal loan that allows you to combine multiple debts into one manageable payment and one interest rate. These loans make it easier to clear your debt and help you save a bundle in interest. The Salt & Lime debt consolidation loan is also available for those with bad credit.
Key features of the Zesty debt consolidation loan include:
Interest rates from 17% (17% APR)*
Loan terms of 1-5 years
Loan amounts between $4,000 to $20,000
Same day funding**
Ability to make extra repayments with no penalty
We also offer customers the opportunity to earn interest rate discounts as they go — simply complete eight quarterly financial education modules! Plus, if you refer a friend and their loan is approved, we’ll take $100 off your loan!