It isn’t at all unusual to face a few money issues as you go through life.
You might run into trouble when you’re just starting out and have to pay off college loans or you’re trying to buy your first home.
Money problems can also crop up later in life, as a result of unexpected medical expenses or a job loss, or when you’re nearing retirement and realize you haven’t saved enough.
Whenever they happen, financial problems can be enormously stressful. The good news, however, is that by assessing money issues head-on, and creating a manageable plan to solve them, it’s often possible to bounce back after a financial mistake.
Here are some of the most common money issues people face, and some ideas for how to manage them–or, even better, avoid them in the first place.
Common Money Problems
Americans who are struggling with financial problems can take comfort in knowing they are far from alone. Financial challenges can happen to anyone—whether you are young or older, rich or living paycheck to paycheck. Here are some of the most common money issues that people come up against.
1. High Credit Card Debt
Credit cards can be a useful tool for disciplined consumers who are trying to build good credit. And there are several perks to paying with a card instead of cash, including convenience, purchase protections, and rewards programs.
But many Americans aren’t able to pay off their account balance every month. According to Experian , the average credit card balance in the U.S. in May 2020 was $5,338.
Thanks to high interest rates, items you charge on a credit card and don’t pay off right away end up costing quite a bit more.
The interest you’re charged on a credit card also compounds, which means interest is calculated not only on the principal amount owed but also the accumulated interest from previous pay periods.
That means a credit card balance can grow exponentially, even if you pay the minimum every month. Add in late charges and the possibility that the interest rate could be increased on an overdue account, and it’s easy to see how consumers get into trouble.
Recommended: Simple Interest vs. Compound Interest
2. A Low Credit Score
Carrying too much debt or failing to make credit card or loan payments on time may result in a lower credit score.
A low credit score can make it harder to get a loan, such as a mortgage or a credit card. And even if an application is approved, the interest rate the lender offers may be higher than what’s available to borrowers with better scores. That higher interest rate can make it harder to make payments and keep up with other bills, which can, in turn, further hurt your credit score.
A low credit score can also negatively impact your ability to get a job or rent an apartment. And, it can take years before negative factors like late payments, defaults, and collections are removed from credit reports.
3. Not Having an Emergency Fund
Setting money aside in an emergency fund may seem like a luxury for those who are struggling to meet everyday expenses. But a solid savings buffer can actually be even more important if you’re living on a tight budget.
Without an emergency fund, any unexpected expense that comes along—whether it’s a high medical bill, a car or home repair, or a temporary job loss–can throw you way off balance.
As a result, you might need to use high-interest credit cards, retirement savings, or other options that can add even more stress to a challenging situation.
A solid contingency fund that contains at least three to six months’ worth of living expenses can be an essential component of financial stability.
4. Spending More Than You Earn
Picking up a morning latte and grabbing lunch out may not seem like it could make or break your bottom line. But just $25 per week spent eating out will cost you $1,300 per year–money that could go toward an extra loan payment or a few extra car payments.
If you tend to make spending decisions on the fly (without any type of budget or financial plan in mind), it can be easy to blow through more money than you actually earn, and much harder to achieve your financial goals.
Overspending is one of the most common reasons why people get caught in the debt trap. If you don’t have the cash to cover your expenses, you may rely on credit cards to get you through.
Once you start paying interest on your credit card balance, your monthly expenses go up. This can make it even harder to live within your means and, as a result, lead to more debt.
5. Facing Foreclosure
Foreclosure can be a major concern for struggling homeowners, especially in tough economic times.
People can end up in foreclosure for any number of reasons, including financial mismanagement (buying too much house or choosing a loan payment they can’t afford), or uncontrollable events (such as a job loss or expensive medical condition).
The process is typically slow, often around 685 days. Still, it can be daunting to imagine having to move, especially if it means taking children out of a school or neighborhood they love. And there can be long-lasting financial consequences, as well.
A foreclosure can have a significant effect on a credit score, and it can stay on a person’s credit record for years.
6. Student Debt
While getting a college degree can improve your earning potential, the cost of getting that degree continues to skyrocket. And so has student loan debt.
According to Sallie Mae’s How America Pays for College 2020 report, families reported paying $30,017, on average, for higher education in the 2019-2020 academic year—a $3,751 increase over the previous year.
Collectively, student borrowers in the U.S. now owe more than $1.5 trillion in student loan debt. Student debt is currently the second-highest consumer debt category in the U.S. (lower than mortgage debt, but higher than credit cards and auto loans.)
As students leave college and enter the workforce, paying back that money can be a major challenge. Student loan burdens can lead to postponing certain milestones, including homebuying or having children, and saving for retirement.
Recommended: Average Student Loan Debt 2021: Who Owes the Most?
7. Not Saving Enough for Retirement
According to a recent report from the U.S. Federal Reserve , about a quarter of all non-retired Americans have no retirement savings at all, and fewer than four in 10 non-retirees felt that their retirement savings are on track.
The idea of being able to save enough to live well after retirement–which could run over 1.5 million, depending on when you retire and how long you live–can seem too overwhelming to even bother with, especially if you’re living paycheck to paycheck.
But financial advisors stress that saving something is better than nothing. Thanks to the magic of compounding interest (when the interest earned on your money gets reinvested and earns interest of its own), even putting just a small percent of your paycheck into a 401K or IRA each month can add up over time.
Recommended: Simple Interest vs. Compound Interest
How to Cope with Money Issues
If you’re dealing with money problems (or hoping to avoid any future setbacks), here are some money management strategies you may want to put into place.
Setting a Budget
People tend to cringe at the word “budget” because it sounds like work, but having a budget in place can help simplify your finances and reduce financial stress.
To create a monthly budget, you simply need to gather up the last several months of financial statements and receipts and then use them to figure out how much you’re bringing in (after taxes) each month, as well as how much you are spending on average each month.
If the latter exceeds the former, or is so close there’s nothing left over for saving, you may want to drill down deeper.
To see exactly where your money is going you may need to track your expenses for a month or two and then determine exactly how much is going towards nonessential (or discretionary) purchases, where you may be able to cut back.
You may also want to consider adopting the “50-30-20” budgeting philosophy. With this type of budget, half your take-home income goes towards needs (or essential expenses), 30 percent goes towards wants (nonessentials), and 20 percent goes towards your financial goals–such as debt repayment beyond the minimum, building an emergency fund, and saving for a home or retirement.
Recommended: How to Make a Monthly Budget
Knocking Down Debt
Reducing debt may seem like a tall mountain to climb, but using a systematic approach can help make the process more manageable.
One method you might consider is the snowball method. This involves paying as much as you can each month toward your smallest balance while making the minimum payment on all your other debts so your accounts remain in good standing. Once you’ve paid off that smallest debt, you move on to the new smallest balance and continue this process until you’ve paid off all your accounts.
Another approach you may want to consider is the avalanche method. With this strategy, you start by paying as much as possible toward the debt with the highest interest rate, while making minimum payments on all the others. Once that debt is paid off, you move to the balance with the next-highest interest rate, and so on.
It’s common to face money issues throughout your life, particularly when you are just starting out. Some of the most common include overspending, being burdened by debt, not having a financial cushion for emergencies, and not putting enough away for retirement.
Whatever financial challenges you are facing, you may want to clearly assess the issue and then come up with a spending, saving, and debt repayment plan that can help you get back onto solid ground.
Need some help? If you’re looking to keep better track of your spending and saving, a SoFi Money cash management account may be a good option.
You can use the SoFi app to track your weekly spending and see how you’re doing with your budget. You can use the “vaults” feature to earmark the cash in your SoFi Money account for different goals.
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