Needs vs. Wants

By Sandy Botkin

What are the key factors that incur a lot of debt for many of us? Not understanding the difference between a "need" versus a "want" - the need for instant gratification - and the fact that people are in denial about their financial problems, which must be addressed head on and discussed with their spouse or domestic partner.

Another factor which increases debt is failing to plan for large unanticipated expenses - a phenomenon known as "crisis spending." Usually something breaks down and brings with it a burdensome expense. If you don't set up a savings account for these large, unanticipated expenses, it causes overwhelming debt. Huge unanticipated dental and medical expenses are the biggest culprits, but many other factors can also cause this problem.

Solution: You should have a reserve account set up for these expenses. This is one of the first things you must do even before opening any other type of savings account. Everyone reading this post will at some time in their life experience these sudden unplanned-for expenses. Planning for them is the only way to avoid incurring consumer debt or even worse, credit card debt. 

How much should you save for these large unanticipated expenses? I suggest at least $10,000-$20,000. Moreover, these funds need to be in a risk-free, liquid account. Don't worry about the interest earned on this. The key is risk-free. From my latest book: Achieve Financial Freedom – Big Time!