Though some bankruptcies are a result of circumstances out of a person’s control, many bankruptcies can be avoided by practicing good money management. Below are some steps that you can take to avoid financial problems.
Follow a Budget
A budget is essentially a plan of your income and expenses. It helps you see where your money is going and what expenses you can and can’t afford. Budgets can be for any time span, but it’s generally a good idea to plan a monthly budget for at least one year. The more you know about your money situation, the more control you have.
Calculate your income
Be realistic. Don’t count on future raises or planned career changes. Record the income that you know you can count on.
List your expenses
Look at your past bills and expenses that are coming up and determine how much you need to set aside for things like rent, groceries, transportation, utility bills, medical bills, school fees, and more. Many banks offer the option to view past transactions sorted by categories; this can help you get an idea of where you have spent money in the past. This process can be time consuming, but it is important to make sure that you have an accurate picture of your expenses.
Make sure your budget balances
After listing all sources of income and all anticipated expenses, your total income should be greater than the sum of your expenses. If it is not, you need to either reduce your expenses (and not just on paper – you need to actually spend less) or find additional income. Analyze your expenses to see if there is anything you can eliminate or reduce. For example, you may be able to save on your grocery budget by taking advantage of coupons or you may need to consider moving to a smaller apartment if your rent budget is too high. You can also look at finding a higher paying job or adding a second job to increase your income.
Stick to your budget
The most important part of making a budget is actually following it. There are many free and inexpensive tools available to help you keep track of your income and expenses. Whether you use paper and pencil, a spreadsheet, reports from your bank, or budgeting software, the important thing is that you keep track of where your money is going and do not spend more in any category than you had budgeted for.
Eliminate Unnecessary Expenses
There are some expenses that are necessary: rent or mortgage, food on the table, basic clothes, and other necessities. But many expenses are wants, not needs. One of the key ways to follow your budget is to refrain from buying things you don’t need.
Distinguish between needs and wants
Marketers do their best to convince you that you have to have all the latest gadgets or the trendiest clothes. But before you buy the latest computer gadget or the cute purse in the store window, ask yourself whether you really need it, whether you will suffer actual hardship if you do not have that item. If the answer is no and the item is not in your budget, don’t buy it.
Be realistic in your purchases
Don’t buy more house than you can comfortably afford. Don’t buy the latest gadget with all the extra features when the basic model will do.
Don’t impulse buy
When you see something you hadn’t planned to buy and don’t actually need, don’t purchase it on the spot. Go home and think it over. It’s less likely you’ll return buy it after having had a chance to think it over.
Don’t buy something just because it’s on sale
Buying a $500 item on sale for $400 isn’t a $100 savings if you didn’t need the item to begin with. It’s spending $400 unnecessarily. (And it may not have been a real sale — some stores mark items down almost immediately, to make people think they’re getting a bargain.)
Find alternatives to spending money
For a friend’s birthday, take her on a picnic rather than to an expensive restaurant. When someone suggests that you meet for lunch, propose meeting at the museum on its free day or going for a walk in the park. Instead of buying book and CDs and renting videos, borrow them for free at a library.
Avoid Unnecessary Debt
With the exception of buying a home, paying for education, or making other vital investments, avoid debt and the resulting finance charges.
Pay in cash whenever possible
Avoid installment credit, and be careful with your use of credit cards. The use of multiple credit cards significantly adds to the risk of excess debt. Consider buying used items until you have saved enough to purchase quality new items.
Beware of credit cards
Bankruptcy caused by credit card debt is the easiest to avoid. Credit card holders should try not to spend more money than they know they can pay off in one month. When a credit card holder does have debt, he or she should try to pay off the credit card with the highest APR and avoid late payments at all costs.
Charge items only if you can afford to pay for them now
If you don’t currently have the cash, don’t charge based on future income — sometimes future income doesn’t materialize. Meanwhile, you’ll be paying exorbitant interest rates, which may wipe out any savings that you gained even by buying an item on sale!
Avoid large rent or house payments
Obligate yourself only for what you can now afford and increase your mortgage payments only as your income increases. Consider refinancing your house if your payments are unwieldy.
Avoid cosigning or guaranteeing a loan for someone
Your signature obligates you as if you were the primary borrower. You can’t be sure that the other person will pay.
Don’t make high-risk investments
Avoid investments in speculative real estate, penny stocks and junk bonds. Invest conservatively, opting for certificates of deposit, money market funds, and government bonds.
Pay off debt quickly
If you do have debt, pay it off as quickly as possible. The longer you take to pay off a debt, the more you will end up paying in interest.
Pay more than the minimum payment
Any amount that you pay above the minimum payment will go directly towards reducing the principal. Which means you will pay off your debt faster and pay less in interest over the long run.
Create a debt elimination plan
A debt-elimination calendar can help you reduce or eliminate debt. Mark off several columns on a piece of paper. In the first column on the left, write the names of the months, beginning with the upcoming month. At the top of the next column, write the name of the creditor you want to pay off first. It may be the debt with the highest interest rate, or the earliest pay-off date. List the monthly payment for that creditor until the loan is repaid as shown in the illustration above. At the top of the next column, record the name of the second creditor you want to repay, and list payments due each month. After you have repaid the first creditor, add the amount of that monthly payment to your payment to the second creditor. Continue the process until all loans are repaid. For an example, see page 5 in the pamphlet One for the Money
Work with creditors
If you do find yourself behind on your bills, call your creditors before you get in too deep. Most creditors will work with you if circumstances (job loss, divorce, illness, etc.) have made it temporarily difficult for you to meet your financial obligations. Suggest a temporary reduction in your payment, a waiver of late fees or penalties, skipping several payments now and increasing future payments to make up for it, or skipping several payments and adding them to the end of the loan. Many creditors are willing to work with you because they would rather have the debt repaid than have you enter bankruptcy and risk not getting repaid at all.
Counsel with experienced advisors
It can be helpful to talk with an experienced financial advisor or a reputable credit counseling agency.
It is important to have sufficient medical, automobile, homeowner’s, and life insurance. Even a basic policy with a large deductible can help if a crisis comes up. This will mean extra monthly expenses, but will save you a lot of money and stress in the event of an emergency. You can’t avoid emergencies, but living without insurance is an invitation to financial ruin.