The Trap That Is The Debt CyclePosted by: Karim Rahman
December 28, 2011

Living in a debt cycle can be one of the most frustrating things for people who are working hard to live financial free.  You work hard to pay off debt and before you can blink you’re in debt again.

So what causes a debt cycle, anyway?

Even if you hate debt and try to avoid it, you might encounter the debt cycle under the following circumstances:

  • You pay off your student loans, but decide to take out a loan for another degree.
  • You encounter medical bills you don’t have the cash to cover.


  • You pay off your credit cards each month, but you got careless one month and spent more than you could reasonably pay off in the current month or in the months to come.
  • You decide to buy a washer and dryer with a special 0% financing.  Here’s the deal on these:  you’re getting 0% because you’re paying top price for the product.
  • You didn’t have enough car savings, so you had to take out a loan to get a replacement car.
  • You decided to take out a home equity loan to install your new pool.

Do any of these situations sound familiar? As I said, even the most astute personal money managers can find themselves in the debt cycle which quite frankly, could be never ending if you’re not careful.

The problem with such a cycle is never really reaching the point in your life to gain complete financial freedom.  Sure, you might have built some wealth and even have cash savings, but in my opinion, you’re never truly free if you owe something to someone.

So, how do you avoid a debt cycle?

Consider the following tips:

  • Only go back to school when you know you have the cash to pay for it. That may seem extreme to some of you, but you have to make a choice, don’t you?  You’ll either choose to be in debt and more educated, or debt free and position yourself to be open to more opportunities.  Rather, start paying off your student loans and promise to never get new loans again.
  • We can’t predict medical expenses.  They are a fact of life.  But, we can be prepared for them and the best way to do that is to buy as much medical insurance as you can afford (especially for those who are in higher risk situations), contribute to a Health Care Flexible Spending Account to save money on medical expenses, and finally, have a well established emergency fund to protect you from the expenses your insurance can’t.
  • There isn’t much to say for credit card or 0% financing expenditures other than to avoid them.  In fact, these are probably situations in which you have most control of.  Just say no!
  • I think one of the leading causes of the debt cycle is car debt.  You have to save money for a car if you want to avoid this cycle and you have to pay cash for replacement cars.  It may seem like an insurmountable goal, but it can be done!
  • As with credit card spending, your home equity loan is also your choice.  While you might feel like you’re investing in your home with such expenditures as a pool, deck, etc., you still owe something to someone at the end of the day.  Wouldn’t you rather be financially free? 

Ask me about a Financial Need Analysis and lets work on getting out of DEBT

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