December 8, 2023

The Debt Spiral

The Debt Spiral

If properly managed, debt can be a useful tool that enables us to bring our spending forward and improve our quality of life. In fact, the reality is that most people, companies and countries have debt. According to a new study, an average Australian is in more than $20,000 of personal debt in 2023. The problem, however, starts when we get caught in a cycle of borrowing and spending that leaves us with an ever-expanding amount of debt that needs to be repaid.

The reality is that most of the time, people are reasonable with money, and it is circumstances beyond their control that cause them to be unable to keep up with their financial commitments. Here, credit counsellors exerts explore the causes of debt, and how over a lifetime, people can find themselves in debt and in circumstances they never anticipated.

Social Credit - Why We Fall Into Debt Spiral

Human nature tends to push boundaries as far as they can go. And when it comes to something as emotional as money, increasing the amount borrowed time and time again is, unfortunately, no exception to this rule.

For many individuals, the road to bankruptcy is carved out from their early years, as a result of watching their parents’ money struggles - not making enough income to put food on the table and pay the mortgage, or worse - due to bad money habits and reckless spending! The money attitudes we inherit, combined with a constant barrage of advertising by banks and other lenders offering easy credit, and the popularisation of glamour and bling on social media, serves to reinforce the normality and acceptability of “Keeping up with the Kardashians”, and using credit in order to finance luxurious lifestyles.

Whilst this is quite often the “popular” explanation as to why people have money troubles, it is only one example of the various ways in which people unwittingly find their finances spiralling out of control. At the end of the day, we are social creatures and the need to belong and live prosperously is hard-wired into our DNA - who can blame us for wanting to keep up?

Expensive Education

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For many young people, the domino effect continues when they go to university. Of course, many people understand that education is an investment, and in most cases, it is - the more skills you learn, the more productive you can be and the more you can earn! However, given the rapidly changing dynamics and lack of security in the current job market, it has been argued that some degrees aren’t worth the tens of thousands of dollars they cost (even on HECS).

Whilst fortunately in Australia, incurring a HECS debt has no upfront costs, the amount of the debt is indexed to inflation (meaning it does incur an interest-like charge which can add up to thousands of dollars over one’s lifetime) and is paid off gradually based on meeting certain income tax thresholds. The downside, therefore, is that incurring a HECS debt has the immediate effect of reducing your net worth during a time when most students don’t have the means to start repaying the debt and face the harsh reality of an uncertain job market in a struggling economy.

Credit Card Crunch

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Credit cards often come into play as a way to “earn rewards” or finance luxury extras (such as discretionary spending on consumer goods or holidays), but for some, credit cards become a means of covering the day to day costs of living when their usual income is not enough.

We all know the catch is that credit card interest rates are astronomical! Whilst many credit cards have an interest-free period, all it takes is to miss one short deadline, and then you start getting hit with interest charges! For someone who is already struggling financially, this is the very definition of adding insult to injury and one of the biggest causes of debt in Australia!

Cars and Money

buying car and money fall us into debt

For those who live rurally, or have no choice but to commute to work each day, car ownership is non-negotiable. As a result, vehicle financing is yet another factor that can put people into debt. Of course, there is nothing wrong with owning a vehicle - especially if you can afford it! However, the trouble starts when emotions take over. It’s fine to have a dream car in mind - but especially for those young people who have yet to consider a long-term plan for their lives and finances - be careful about going overboard.

Your brand-new dream car may be fun to drive out of the dealership, but those fuzzy feelings will wear off quicker than you think, and will soon be replaced by the anxiety of (potentially) many years’ worth of repayments.

This factor can become even more pronounced if you have to manage inevitable life changes - such as moving jobs or cities, the decision to start saving for a house, or the desire to go on a holiday. Having good cash flow is key to staying afloat financially, and maintaining an affordable vehicle loan (if you can’t save up and must get a loan is the difference between having a car that you love or a car that you loathe)! If you want some more information about how to get a car, check out our article: 8 Ways to Save for Your First Car.

Mortgage Matters

mortgage matter

Once most people have finished their education and have a car, getting a mortgage is next on their financial life goals agenda. Buying property is typically the most expensive purchase that anybody will make in their lives!

The decision to purchase a property, of course, should be celebrated, because in the long run, it works out better financially to pay off your own mortgage rather than somebody else’s (as you get to keep the equity)! However, anybody who has crunched the numbers of their dream home in a mortgage calculator would know that the percentage of income required to make house repayments are expensive!

And not to mention, now that lenders allow people to purchase property with as little as a 5% deposit instead of 20%, more and more people are able to get themselves into a whole lot more debt with a whole less security! Other costs that property owners must factor in is the ability to service ongoing property maintenance costs (such as council rates and utility bills). Want to know more about what’s entailed in purchasing a home?

Check out our article: Costs of Buying a Property.

A Series of Unfortunate Events and How to Get Out of Debt Spiral

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The reasons why most people fall into debt are actually as a result of unfortunate circumstances. Unemployment and loss of income is unsurprisingly the biggest cause of debt spiralling out of control, and in most cases, economic factors outside of the individual’s control are to blame.

Some people, unfortunately, do fall victim to the excessive use of credit, and some people also experience the debt spiral as a result of the loss of a family member, divorce or separation. Illness is yet another factor that can unexpectedly take a toll on one’s personal finances.

Of course, this list is not exhaustive, but these are incredibly common scenarios that average people who never thought they’d be in debt, unfortunately, do find themselves in. Every day over the past 21 years, the team at Credit Counsellors has seen first hand the intricacies of personal insolvency, and in this time we have come to truly understand that debt does not discriminate. And nor do we.

Without judgment or criticism, our team is here to help people find a way out of debt, so that they can look forward to their future and keep progressing in their lives. Are you struggling with debt and ready to take control? Call us on 1300 003 328.

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