So you've wound up in debt and you can't understand why? There are a number of common reasons for debt in Australia. It can happen to anyone and often, all it takes is one event to knock you off financial track. Once your finances fall off track, it can be incredibly difficult to get them right again.
The Australian Financial Security Authority (AFSA) is the governing body responsible for Insolvency actions in Australia. According to statistics released by AFSA, some of the more common reasons for Debt in Australia include:
- unemployment or loss of income
- excessive use of credit
- ill health
- relationship breakdown
- adverse legal action
- liabilities due to guarantees
Here are some reasons for Debt in Australia and some preventative measures you can take to ensure you don't fall into debt.
Unemployment, Loss of Income
8035 people who entered Personal Insolvency said Unemployment or a Loss of income was the cause of their debt.
There is no way to predict the future and even if you are lucky enough to have a long-term, stable employment, there is always a chance things could change at the drop of a hat. If you were suddenly left without a job, could you cover your bills and living expenses until you found a new one?
The majority of Aussies would say no. But there is a simple way to ensure you are covered in case of emergency - insurance. Many people scoff at the thought of income protection insurance, but for a small monthly amount, it could save you in a time of need.
Different policies cover different things, but you can protect your income against sickness, injury and even involuntary redundancy. An income protection insurance payout will provide you with regular funds to keep up with your bills and everyday expenses while you recover or look for a new job, sometimes for months on end!
Excessive Use of Credit
8870 people who entered Personal Insolvency said Excessive Use of Credit was one of their main reasons for debt.
There are some horror stories about people spending money they don't have and falling into debt. Some have done it through their own poor decision making, and others have fallen victim to a string of unfortunate circumstances. Excessive Use of Credit is the most common of all the reasons for debt.
For example, one client who contacted us for assistance had already sought help from their bank to consolidate their debts. They were lucky enough to receive a loan for $30,000 to pay out existing debts but instead spent the money elsewhere; leaving them with $60,000 worth of debt they couldn't manage.
While this might be an extreme example of poor financial decision making, it is all too common. So too are the cases of people being caught in a credit spiral, using credit cards to pay off credit cards. Once debts like these are acquired, they can be quite hard to shake but they can be easily prevented in the first place.
Money management skills aren't taught in school, so by the time you start making and spending money, you are really only guessing what to do with it. Some people get it right, but many people get it wrong.
By keeping a budget, you know exactly how much money you need and how much money you have to get through each day, week, month, year. By keeping track of your money and spending you are less likely to spend sporadically and make poor financial decisions. To get started with a budget, read our easy How To Budgeting Guide.
Don't be afraid to speak to your kids about money. Let them learn from your mistakes, or if you're forming a budget, involve them in the process so they understand how important it is to plan, save and invest.
When you are in a relationship everything is shared. You share the rent, the groceries, the housework, the car. So when that relationship breaks down, what used to be affordable is suddenly doubled. Not only are your regular expenses quite costly, but you could be left with joint debts to pay on your own.
While it's nice to think every relationship will last the distance, it doesn't hurt to be conscious of your money. It's wise to keep an account in your own name so if anything happens to your relationship, only you can access it. Make this a small savings account, so if you do break up, you have the financial support you need to get back on your feet and find alternative arrangements.
You should also consider life insurance. In the case of you or your partner passing away unexpectedly, you don't want to leave the other with unaffordable debts.
Falling ill or injuring yourself can be a very traumatic time in your life. Add the mounting medical costs on top of your regular expenses and you have a recipe for disaster!
While it's hard to predict when illness or injury will strike, you can do your best to protect your income. This is also where income protection insurance would be a good idea. The peace of mind it provides in an emergency is worth every dollar.
Alternatively, you can try to create your own financial backup plan by creating a rainy day fund. Financial experts recommend you save 3 months worth of salary in a high-interest account to use in case of an emergency. This amount might seem excessive, but you know you will be covered financially for at least 3 months if anything ever happened to you.
Gambling is ingrained in Australian culture and often comes hand-in-hand with our love of sport and competition. However, for some, gambling can become a serious problem. Gambling can cause severe financial hardship and impact your health, relationships and employment. Many things can trigger a gambling addiction and only you can identify when it becomes a problem in your life.
If you are spending more money and time gambling than usual, chasing your loses or struggling to control your impulses, it may be a problem. Visit Gambling Help Online for help and resources to use when facing a gambling addiction.
The remaining 2743 people who entered personal Insolvency in 2016-17 said something else was the most common reasons for debt.
There are limitless reasons for debt. Be prepared to avoid financial stress and debt stress. By sticking to a budget in your day-to-day life you can stay on top of your bills and have an overall view of your finances. Then if you do suddenly find yourself out of a job, you'll know exactly what to prioritise.
Already in Debt?
If you are already experiencing debt, there are a number of options to help get your finances back on track. In fact, the sooner you act, the more options you have available to you. If you are feeling a financial pinch and don't know how to catch up, consider the following options.
You can consolidate your debts into your mortgage by using the equity in your home loan. This makes your repayments far more manageable and brings them into one, manageable debt over a number of years. If you have tried to consolidate your debts through your existing lender and failed, we may be able to help. We recommend a specialist lender, Debtstroyer Home Loans, for these situations.
A Part 9 Debt Agreement is a way to reduce your debt, pause your interest and repay your creditors. It is a repayment arrangement with your creditors, reducing your debt to a level which you can afford. A Debt Agreement will give you more time to repay your debt and will put an end to the harassing phone calls.
Are you considering bankruptcy to get out of bad debt? Have you considered your alternatives? Bankruptcy comes with a number of harsh consequences and restrictions which intrude on your life for a number of years. To avoid these consequences, consider other debt relief options before Bankruptcy even comes on the table. To speak to one of our friendly Case Managers about your debt situation call us today on 1800 534 534.