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7 Main Causes of Financial Problems (And How To Fix Them!)

Are you struggling with financial problems and have no idea how to get out? Discover what are the main causes of financial problems, and how to fix them! 

It can be hard, or nearly impossible even, to recognize the real causes of financial problems you’re facing, especially when it feels like they’re consuming you and there’s no way out. 

But let me tell you: there is. No financial struggle is a complete doomed cause once you know where it originates and follow some steps to correct that, even if some seem completely unsolvable. 

Image of a woman grabbing her head in front of a computer, inserted in a post about Causes of Financial Problems.

In this post you’ll find the most common causes of financial problems to help you recognize which are yours, and hopefully teach you how to fix them, so you can move a step closer to living a life of financial freedom.   

Poor Money Management 

It sounds harsh, but it’s arguably the number one cause for most financial difficulties, and might be the one that’s affecting you. 

Poor money management means that even if you have the funds, or enough monthly income to cover your expenses and maybe even save a little, it’s very hard to make ends meet and you never know where the money goes. 

A lack of supervision of your incomes and expenses results in spending too much on unnecessary things, using more money than you actually have, and, consequently, incurring in debt: a massive cause of financial issues (and which we’ll cover more in detail in the next point!) 

Poor money management also comprises the inappropriate use of credit. Credit cards are an amazing asset, and they can be great life saviours in emergencies, but they’re also dangerous if misused. They give you the false belief that you have more spending money than you actually do, and it makes it very easy to indebt yourself by overspending. 

Now, how do you fix the financial problems that derive from mismanaging your money? The answer actually lies in the main cause of poor money management: the lack of a budget.  

Not having a budget or a financial plan to guide your expenses can get you into real trouble. On the other hand, having one will not only help you prevent overspending, but can also keep you on track to achieving your financial goals

What’s more important, you’ll know where your money goes every month, and being aware of your income and expenses makes it easier to address financial problems ahead of time.

If budgeting sounds too complicated (I promise it’s not!), you might also want to consider learning a little bit about personal finances, how to manage your money, and how to budget. There are plenty of blogs and books for beginners that can give you the boost you need to get your finances in order.   

Financial literacy is, in fact, one of the best (if not the best) financial problems solutions for any circumstance, so it’s always worth learning about it!

Debt

One of the main causes of financial distress is debt. The dreaded term has nothing but bad connotations, although there are debts that are actually good ones: mortgage and student loans, for instance. 

Those kinds of debts are difficult to escape if you’re planning on going to college or dream of owning your own home, but as long as you include them in your budget and plan for them, they shouldn’t be a cause of financial stress. 

The other kinds of debt, though, should be avoided at all costs. Most solutions for financial problems actually involve getting rid of debt – and we’ll see how to do that in a minute. But first, you need to make sure not to indebt yourself any further (or at all, if you have no debt!) 

The most common type of debt comes from credit cards, as you saw in the previous point. Remember: Credit card money is nothing but a loan, so only spend what you already have in your pocket or bank account (never more!) and be sure to pay them on time. 

Don’t take loans for anything that’s not a life or death emergency, and start working on your emergency fund ASAP (next point!) so that even then you have no need for them. 

Pay your bills on time, every time. Having a budget will help you know how much you’re due in the different areas of your life, and keep track of them so you’re always prepared to pay them.   

Finally, identify any areas in which you’re prone to splurge or overspend, so you can work on cutting those impulses. Are you a shopaholic? Do you always get more than you need when grocery shopping? Do you eat out every night? 

A good motivation to stay clear of those expenses is knowing how far they can set you back financially, and imagining what the pile of debt they’ll create will feel like.

You now know the basics to stay out of debt. How to solve financial problems when you’re already struggling with it?

First and most important, make a list of all your debts and create a financial plan to pay them off. Once you know how much you should allocate to that purpose each month, add it to your budget and stick to those payments

You will likely need to make some cuts on other areas of your life to afford them, like entertainment, shopping sprees or dining out, but paying off debt should be your first priority. You can always go back to enjoying your lifestyle – and with much more freedom – once the debt is gone.   

If you’re battling with mortgage payments, look into refinancing it. This could not only lower your monthly fees but also the interests, and on some occasions even shorten the term of your mortgage, so you’d be winning on all ends. 

You can also look for ways of increasing your income, refinance other loans, or try to get lower interest rates.

Not Being Prepared for Emergencies 

Not investing in an emergency fund can also be the cause of financial difficulties. Emergencies are, as you surely know, never planned for or expected, and they can take any shape – car breakdown, medical urgencies, leaking roof – and show up any time.

Since emergencies don’t necessarily occur when it’s most convenient for your budge, it’s important to be prepared for them. And that’s where emergency funds come in. 

An emergency fund is basically a savings pot that you’ll contribute to on a monthly basis, but won’t use until an emergency arises and you have a real need for the money. 

Not being prepared for these occasions is one of the things that can get you into debt and, consequently, financial trouble – it’s one of the worst money habits you can have!

You can start by allocating to it any amount of money you can afford, and increase it overtime – remember to add this new category to your budget!

Loss of Income 

Loss of income is another reason for having financial difficulties. Either because you lost your job, or your salary was reduced, your expenses won’t suddenly adapt to the lack of income, and that could get you intro monetary trouble. 

If you have an emergency fund (good for you!) now it’s a good time to use it. How long you’ll survive with it will depend on how many months’ income your savings are worth – some say an emergency fund should cover you for a year, some aim at having a 6-month savings pot. 

Whichever your case is, your emergency fund should be able to keep you afloat for some time while you look for more permanent solutions. 

The first solution would be getting a new job or increasing your income in some way. There are plenty of jobs you can do from home, or side gigs that can start making you money in no time so you get back to your feet. 

It’s important to either make use of your emergency fund or get some extra income, even if it’s small, as soon as possible, so you don’t start accumulating debt. Once that’s covered, you’ll be able to focus on what to do next without having to worry about the bills

Taking Risks when Investing

It shouldn’t come as a surprise that risky investments are often the cause of financial problems. The possibility of substantially increasing your net worth by investing a few thousand dollars can be tempting to anyone, especially when the return seems feasible. 

This notion of becoming rich through investing, though, can lead new investors to allocate their money on stocks, bonds, or companies without truly understanding how the stock market works. This is a disaster recipe, because more times than not, those investments will result in losses

It can also be the cause of monetary distress when it’s done recklessly and on impulse, instead of taking place after a careful analysis of the market. That’s why investing should go hand in hand with education about the topic.

If you’d like to take up investing to grow your revenue or net worth, you should first know what you’re doing, study the market, and maybe even get some advice on what are the best assets for you to invest in

The rule of gold? Only invest what you’re willing (and can afford) to lose. If you get something out of your investment, fantastic! But if you don’t, at least you won’t be paying for that financial setback for years on end. 

Starting Fresh

Starting anew is refreshing, and it’s also a great opportunity to widen horizons, take up new activities and renew energies. But more often than not it also has a nasty side effect: financial difficulties

Starting fresh can involve anything from getting your own place, moving in with a partner, or getting divorced. It could also mean moving to a different city or country, or changing jobs. 

While the last alternative can hardly get you in a bad monetary position (unless your salary is lower than before), the rest of them, as fun and exciting as they sound, cost money

If you’re moving on your own for the first time, you’ll have to start paying for your own bills (and maybe discover some you didn’t even know existed!), as well as pay rent or mortgage fees, and perhaps even new furniture and appliances.  

While moving in with someone has the benefit of there being two of you for those expenses, living with a partner also means re-learning how to manage your money, perhaps creating a common budget, and deciding how you’re gonna split costs and contribute to the household

If you have no idea how to do so, not only could you struggle financially but the relationship could suffer – and you don’t want money to be the reason for arguing or worse!

And while divorce can already be painful in itself, it also involves the breaking up of a common budget and finances management, as well as finding a new home and starting to pay for everything on your own

There’s no escaping the changes in life, and most of them are actually positive! So, how can you avoid the financial distress they can cause? 

Know exactly what your expenses will look like when you make the change. If you can, plan for that new flat or project of living together in advance, so you can start saving or looking for alternative sources of income to help support it. 

Once you start fresh, budget and be mindful of what you spend your money on. It may be that, at least for the first few months, you can’t really afford that daily iced latte on your way to work like you used to. And that’s ok, because you just moved on your own! That’s gotta be worth some effort and frugality, which should only last until you get your new budget under control anyway

Budget, budget, budget! That’s the key to success

Not Planning for Retirement 

Retirement might seem like a million miles away right now, especially if you’re in your twenties and just getting out in the world. But there’s no better time to start saving for retirement like the present!

Image of a glass jar with coins and dollar notes inside, and the word retirement written on the outside, inserted in a post about Causes of Financial Problems

It’s the only way you can ensure that you won’t go through deep financial stress and struggles when your working days come to an end – or that you can actually stop working at some point. If you don’t prepare for it in advance (meaning years to decades in advance), it might be that you can’t afford to retire at all

To prevent this financial crisis, which can be catastrophic, it’s as important to start a retirement savings account as it is to have an emergency fund, if not more. 

How do you do it? First, find out if your company offers a retirement plan, and start matching your employers’ contribution. An alternative would be opening your own retirement account, either a 401(k) or an IRA, and start investing in it yourself (and ASAP).   

Both accounts are tax-advantaged, and they’ll ensure you have a nice amount of money by the time you decide to retire, solving financial problems ahead of time and allowing you to maintain your lifestyle, with no money-related issues to worry you while you enjoy your new freedom – that of time!

Hopefully, this list of the most common causes of financial problems has helped you identify some of yours, and get you on track to solving them.

Remember that having a healthy financial situation requires commitment and work, and money matters are not solved overnight if you’re in trouble – but they can be solved, and that’s worth all the effort