The never-ending cycle: Can you be saved?
As funny as that may be, the debt cycle for many Americans is one that leaves them feeling unsalvageable once entering it. Getting out of the debt cycle might be difficult but is by no means impossible. According to marketwatch.com, "At the start of the year, U.S. household debt reached a record high of $17.3 trillion, according to data from the Federal Reserve Bank of New York (NYFRB)."
What is a debt cycle?
When one enters a debt cycle, they are accumulating more debt than can be repaid to the loaner in a reasonable time frame. With an inability to repay debt, often what follows is a large accrual of interest payments that must be made alongside the principal. This causes great stress on the individual, decreases their credit score, and demotes them to a state of lesser financial stability.
How do people enter debt cycles?
Entering debt cycles looks different for everyone but can have the same impact across the board. For some individuals, entering debt cycles can be done by splurging on large assets such as cars, boats, and houses. For others, entering debt cycles can be done through racking up large amounts of credit card debt by spending money that is not readily available. Entering these types of cycles happens to the best of us, even those who we may least expect. For example, Mike Tyson, a world-renown boxer, made $400 million in his boxing career and still found himself $23 million in debt in 2003. Tyson was known to live a lavish lifestyle, spending money on cars, jewelry, parties, and even his famous tigers. The price tags on all these things eventually became too much to bear, leading to his filing of bankruptcy. When people live lifestyles that are above their means, a debt cycle is bound to happen and can have crippling consequences.
How can one get out of the debt cycle?
Simply stated, getting out of the debt cycle is attained by living well below your means. Once a particular lifestyle is routine, breaking it can be difficult, but not impossible. Making a budget where only spending money on necessary purchases and not splurging is important. In addition to spending as little as possible, taking a portion of the money being saved and putting it aside in an emergency fund can help prevent going into greater debt in times of desperate need. Referencing our previous blog post on creating an emergency fund can provide more information on how to effectively do this.
Like Mike Tyson, realizing that living well above your means and plummeting yourself into a hole that is difficult to climb out of is the first step in solving the problem of the debt cycle. Talking to a financial professional and coming up with a plan for a financial comeback can not only lead to lesser stress in the long-term, but also create a more stable financial future.