What Are the Causes of Financial Problems?

Financial problems are an unfortunate reality many people face at some point in their lives. College students, mid-career workers and even retirees can encounter similar economic issues. An understanding of the most common causes of financial troubles can help you avoid or reduce stress during difficult times.

Poor budgeting is one of the most common causes of financial problems. If a person is spending more than he is earning, he is setting himself up for money trouble. Many people start using credit cards and loans to offset their high expenses. As interest piles up, these debts become larger and more difficult to pay off. Setting a household budget is essential for avoiding these financial problems. Plan monthly expenses around loans, mortgages and other bills before spending cash on entertainment and luxuries.

A complete loss of incoming cash can destroy even the most balanced budget. While it may not be possible to prevent job loss, some financial forethought can mitigate the damage. Depositing money into a savings account each month is essential for weathering a period of unemployment. Financial advisers recommend setting aside enough money to cover your living expenses for about three months.

Even the greatest financial planners are not always prepared for costly emergencies. Sudden medical, educational and home expenses can eat away at savings accounts and monthly budgets. People often turn to additional loans in order to pay for emergencies but then fail to account for the loan payments in future budgeting. Remember that each new expense requires careful balancing with previous costs.

When financial problems occur, some people look for answers and advice in the wrong places. Friends and family members may have the best intentions but are not always qualified to give financial help. For example, failing to get the correct tax advice could result in heavy fines from the Internal Revenue Service. Insurance, tax and investment experts may be expensive, but the best ones stand behind their advice. Be sure a financial adviser understands your situation and has solid references before you put down any cash.

The promise of high returns attracts many people to the stock market, but not everyone is prepared for failed investments. Losing money is a reality of investing that each person must be comfortable with before pumping hundreds or thousands of dollars into the market. If you are uncomfortable with the risk, park money in savings accounts, bonds and certificates of deposit. The returns are lower, but so is the risk.

It is never too soon to start planning for your retirement. Setting money aside early-- even if it is only a few hundred dollars -- will help in the long run. Saving for retirement is especially important for self-employed workers who do not benefit from employer contributions.