Identify The Causes Of Financial Problems To Reduce Financial Stress
Identifying the causes of financial problems is the priority when financial hardship strikes.
Better yet, knowing the causes of financial problems can keep you out of financial trouble in the first place.
An Analogy To Understand Causes Of Financial Problems
Let me use an analogy to bring these opening points together.
Limit Your Chances Of Having Financial Trouble
Most of us know there are things we can do to improve our health. You know the list.
Maintain a healthy weight. Eat a nutritious and balanced diet. Exercise regularly. Drink alcohol in moderation. And by all means, don’t smoke.
By doing these things we can limit our health risks. The same goes for our financial health and money management activities.
Therefore, it is important to know the causes of financial problems. By learning the causes of financial problems, you can engage in the right money-related activities for your situation. And avoid financial problems in the first place.
What If You Get In Financial Trouble Anyway?
Let’s take the analogy about our health and our finances 1 step further…
It is almost a certainty that each of us will have a health problem at some point in our lives.
So what do we do? We visit the doctor. The doctor’s first step is to do an examination. And determine the cause.
Only when your doctor knows the cause of the problem can he or she determine the best solution. And the same goes for your finances.
What Should You Do If You Get Into Financial Trouble?
If you get into financial troubles, first determine the cause. Then, come up with a solution. Just like a doctor.
For today, I’m going to play a money doctor. And review the common causes of financial problems.
Brief Recap: Avoiding Financial Trouble
As I said, by knowing the causes of financial challenges, you can change your behaviors in advance. Set good financial goals. And avoid financial problems in the first place.
Or, if in the unfortunate event you get into financial trouble. Then, you will have a checklist to identify the cause. And determine the best solution. Just like a doctor.
Causes Of Financial Problems
Without further delay, here are the top causes of financial problems.
Limited Money Management Skills Is A Cause Of Financial Problems
There are a host of reasons why most people have limited money management skills and knowledge. Here are a few.
Little Education About Money Can Cause Financial Hardship
Our educational systems fail us in this regard. Most of us make it through high school and college without taking a class in personal finance.
Assuming Money Issues Are Too Complex
Money management and investing issues can seem overwhelming. But they do not have to be.
First of all, do not be intimidated. Furthermore, look for ways to simplify and streamline your finances. Finally, just get started and learn as you go.
Not Making The Time To Learn
So, most of us will not learn money management skills in school. Therefore, it’s up to us to make time to learn. We have to make the time.
Even a little basic knowledge helps. It brings you the confidence to plan and set financial goals.
Skills To Maintain a Budget
Once you carve out some time to start learning, I would focus on a couple of the basics. First of all, learn how to create, maintain, and stick to a cash flow budget.
Discipline to Build An Emergency Fund
Then find a little extra cash in your budget to build an emergency fund. The events of 2020 should provide motivation. You never know when the next financial emergency will strike.
There’s more, but before we move on to the next cause of financial problems, take the time to learn money management skills.
There are plenty of good books, websites, and financial coaches available. So, pick a resource and start learning money management skills today.
Personal Issues Can Cause Financial Problems
Sometimes the biggest problems in life start between our ears. And lead to behaviors that hurt our well-being.
Personal finance and money management is no different. Personal issues described below can be the cause our financial challenges.
So, it’s a good idea to be aware of the wrong thoughts and behaviors. Those thoughts that get in the way of our success with money.
Lack Of Objectivity
Running your finances is similar to running a business. In my business career, I saw the most success when we gathered the facts. Followed by making informed, objective decisions to achieve a goal.
Emotional Attachment To Something
By being objective, we keep our emotions in check. Emotional decision making will often lead to financial stress.
For example, just because your grandpa worked for General Electric and made a fortune off his General Electric stock doesn’t mean General Electric is a good investment today.
Furthermore, maybe you make the mistake of falling in love with a house you just can’t afford.
Or finally, when it comes to the stock market, remember the old saying “Be fearful when others are greedy”. Many people struggle with stock investing because they let their emotions drive their decisions.
Addiction to drugs, alcohol, and gambling can be at the root of financial problems. Decide if you need help. And if you do, go get it. Your family and your finances will thank you.
Okay. Big egos are a personal “pet peeve” of mine. I can’t stand people with big egos.
Furthermore, an ego can lead to financial problems. You know the person I’m talking about. They have to have an expensive car, the largest house, exotic vacations, the finest dining, and best cigars.
Those belongings and desires cost a lot of money. And most of those folks with egos are on the money treadmill. They keep making money and spending money, but never really get anywhere with their finances.
So, when you think about money, please check your ego at the door.
Trouble Trusting Other People
When it comes to money, you have to trust someone. There are good financial institutions and financial advisors. And, there are bad ones.
Do your homework and pick the right people and entities to get involved with. Most of us are not born with financial skills. We have to learn from someone.
And, we can’t bury our money in the back yard. We have to trust banks and brokerage firms in our modern society today.
Bad Financial Decisions Will Cause Financial Problems
It should go without saying, but your decision making is very important. It is important both in life and concerning your finances.
Bad decisions can lead to financial hardship. This is so important that I wrote an entire article about bad financial decisions.
Furthermore, bad financial decisions stem from the first 2 topics we just discussed: lack of knowledge and personal issues.
Finally, I discovered nearly 40 bad financial decisions when researching and writing that article. As a summary, they fell into 5 broad categories:
- Bad spending habits
- Poor financial management
- Irresponsible investing practices
- Shaky personal judgment
- Difficulties with debt
Be sure to check out that article so you know all the areas where you may make a bad financial decision.
Debt Is Our Next Big Cause Of Financial Problems
Many of the topics we are discussing today cause financial problems. On the other hand, high levels of debt are often the result. And high debt levels will cause more financial problems for sure.
Here is an interesting way to think about debt. Debt follows the natural cycle of our lives. This is what I mean…
We graduate from high school. For many of us, college is the next step. College is expensive so we take on student loans.
Credit Card Debt Can Cause Financial Hardship
As we enter our late teens and early 20’s, there are just so many things we want. Nice clothes, the latest electronics, travel, and more.
But we have little money. And make little money at this stage of life.
So what do we do? We load up our credit cards to buy and have the things we want.
Automobile Loans And Leases
Now college is over and most of us need a car to get around. So we get that car and now have an automobile loan.
Moving Out On Our Own And Mortgage Debt
Living with our parents gets old. Or, we want to get out of that apartment and own our own space.
It’s just natural. We want to move out on our own. And, to do so, we take on a mortgage.
Before you know it, we are 30 years old and loaded with debt. Then, have an emergency or lose a source of income and that debt will cause all kinds of financial problems.
But there’s much more. Before we move on, just know that debt follows us through the natural cycle of our lives in the modern world.
So don’t take debt lightly just because the world makes debt seem okay. So, I want you to think long and hard every time you are considering increasing your debts.
Low Saving Rates Cause Financial Problems
So far, we have identified these causes of financial problems:
- Limited money management skills
- Personal and behavioral issues
- Bad financial decision making
- High debt loads
What do all of these financial challenges lead to? The answer is a low savings rate. Many financial experts recommend saving at least 20% of your gross income.
In contrast, the 2019 personal savings rate in the United States was less than 8%. That’s a pretty big gap from the 20% recommendation.
Unexpected Decrease In Income Results In Financial Trouble
A sudden and unexpected decrease in income can lead to financial troubles. Usually, this is a result of a job loss. And one’s investment income can’t make up the difference.
The recessions of 2008 and 2020 prove this out. During these times unemployment rates increased dramatically.
Health And Medical Issues Cause Financial Problems
Health issues can cause financial problems in two ways. First of all, health care is expensive.
Furthermore, one’s poor health can make it difficult to earn an income whether the issue is a result of illness or an accident.
To avoid health issues from causing financial problems, be sure to check your insurance coverage. Do you have adequate health and disability insurance coverage in place?
Volatile Financial Markets Can Lead To Financial Problems
I write a lot about investing here at Dividends Diversify. Investing doesn’t have to be difficult, but a lot of people make it out to be.
For example, I read an article recently in the Wall Street Journal about an individual investor. The story went like this…
After the financial crisis of 2008, the man needed to play catch-up with his retirement portfolio. Up until this year, he was earning nearly 20% a year through a complex investment called exchange-traded-notes.
When the pandemic hit, he lost nearly every cent. He said, “I’m 67 years old and I’m basically bankrupt in just two weeks.”
This is a clear example of volatile financial markets being a cause of financial problems. It is also an example of bad financial decision making.
Never take investment risks you do not understand. Especially with money, you can not afford to lose.
Thinking Real Estate Will Save You
I remember a lot of my friends getting frustrated with the stock market in years past. It happened after the dot com bubble burst in 2000.
My friends turned to real estate investments. Only to get burned in the real estate crash of 2008-2009.
Don’t get me wrong, real estate can be a productive part of one’s finances. And it probably should play a role.
But don’t be fooled. Unless real estate is your primary business, your home and/or a rental property probably won’t bail you out from financial problems.
Family Issues That Cause Financial Problems
Family and the bonds that families create can be priceless parts of our lives. But family issues can also cause financial challenges. Here are three issues that come to mind right away.
Divorce – 2 people under one roof saves money. Once you split up those savings are gone. And the legal expenses associated with divorce can be costly.
Unplanned parenthood – Kids are expensive. Having children if you can’t afford them causes financial problems.
Even planned parenthood can cause financial problems. As fully explained in “The Millionaire Next Door” keeping kids on economic outpatient care is a recipe for financial stress.
So get those kids “off the payroll” by the time they reach their early 20’s. That’s easy for me to say. I’m not a parent.
Retirement Can Cause Financial Problems
We can’t work forever. Age will catch up to all of us. So retirement is necessary. And longer retirements are becoming the norm these days.
Retirement is supposed to be one of the best times of life. But, if you are not financially prepared, retirement can also be a source of financial problems. Or, in the best case require you to work a job on the side.
Summary – Causes Of Financial Problems
Knowledge is power. And if you know the causes of financial problems, you have a good shot at avoiding those problems
Here’s my summary list of the top causes of financial problems:
- Limited money management skills & knowledge
- Personal issues
- Bad financial decision making
- High debt levels
- Low savings rates
- An unexpected decrease in income
- Health and medical issues
- Volatile stock markets & financial markets
- Thinking real estate will save you
- Family issues
Further Reading About Financial Problems And Opportunities
- Save money on all your purchases with Rakuten
- The most affordable states in which to live
- Solutions for the worst money problems
Disclosure & Disclaimer
This article, or any of the articles referenced here, is not intended to be investment advice specific to your situation. I am not a licensed investment adviser, and I am not providing you with individual investment advice. The only purpose of this site is information & entertainment. We are not liable for any losses suffered by any party because of information published on this blog. See this site’s Disclaimer and Privacy tab for more information.