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How Can Budgeting And Investing Help You Avoid A Bankruptcy

Too often we fail to think about the consequences of financial decisions when we are young.

We believe that things will work out because we are smart in other areas of life. Let's go through 7 things to avoid wherever possible and save yourself a bankruptcy filing.

What is Bankruptcy?

Bankruptcy is a legal debt relief option that allows debtors who can no longer afford their debt to get access to debt relief.

The common bankruptcies that people choose between are Chapter 7 or Chapter 13 bankruptcy.

What Are Things That Can Force Financial Hardship and Bankruptcy?

1. Carrying a Credit Card Balance

It is vital to note that no credit card debt carried over month to month is beneficial. Some people tend to think that having small amounts of credit card debt is harmless, but an interest-bearing credit card means that you are paying for your money instead of your money paying you. It also is a fact that millennials have increased their credit card debt by 7% in the past year.

While it is a norm for most people to have student loans in their 20s, it is not a good idea to carry the debts into their 30s. It is advisable that before you leave your 20s, student loans, and other debts; primarily, credit card debts should be a thing of the past. Credit card debt can get you into an evil cycle that is constant and difficult to come out of.

It is important to note that we are not advocating that it is wrong to use credit cards. Instead, what does not make any financial sense is the habit of carrying a credit card balance while forking out interest.

Even if it is only a small amount, as long as interest is charged, it is still pretty dumb. But all is not lost if you are guilty of this habit as you can still come out of this trap. Even if the entire article does not make sense to you, the most vital thing that you should learn from it is that doing away with any high-interest credit card is in your best interest!

Do you know that there are lots of 0% interest credit cards running for 12 to 18 months? Better still, these credit cards allow you to transfer your balance at a fee. So it is recommended that you transfer the balance by paying a small amount. The next step is to allocate as much money as possible every month until the debt is fully paid off.

What if Your Credit Rating is Poor?

You may ask, ‘What if my credit rating is very poor and getting a 0% card is next to impossible?' What you will have to do won't be easy, and it will take a lot of willpower. Your first order of business would be to get rid of that credit card with high interest rates. You will have to forgo some activities and minimize spending. Dining out, fancy new stuff, high-end electronics, plus any other unnecessary expenditures, should be out of the question.

Until the credit card debt is paid off, make sure that you prioritize your needs and ignore the wants. No matter how long it takes, stay on the path, and be focused till it is paid off. The majority of people in their 30s fall into this financial trap. The best way of accumulating significant wealth is by having the compound interest at your disposal for long periods. By having credit card debt with an accruing interest each month, you can never achieve your dreams. What you will be doing is enriching the credit card companies!

2. Relying Too Heavily on a Single Income Stream

The fact that you love your job to bits, plus your boss and workmates, depend on you a lot is no reason not to have an alternative source of income. Having another income stream is not being disloyal to your employer; rather, it is you looking out for yourself.

While your everyday job might be your primary source of earnings, it is advisable to have a passive secondary earning point. It is not unheard of for the secondary source of income to surpass the primary source in terms of earnings.

It makes absolute sense to earn extra income passively when you are working at your primary job or even when sleeping and during your leisure time. There are lots of opportunities for passive income without the need to get a second job.

Do you know that today, a typical millionaire has at least seven income streams? If one stream of income fails, as sad as it might be, they will still be left with six or more.

Let's say you got fired tomorrow. Will everything be fine?

One of the most popular ways of earning additional income passively is blogging. All you have to do is create a blog, and ensure that it gets enough traffic and the money will flow in.  What is great about this is having done the initial work; you can sit back, relax, and reap the benefits for a long time. It is not surprising that 44% of Americans from 25-34 report to having a side hustle.

3. Lack of Proper Investing or No Investments

It goes without saying that you probably never thought much about making some investments in your 20s. In case you invested, then you have an advantage over many people. If you are in your 30s and you haven't yet invested, this has to change! It will make a huge difference if you invest now rather than in your fourth decade.

Note that by compounding interest and by reinvesting your dividends, a head start of 10 years will contribute significantly to your retirement plan.  While most financial gurus advocate for investing 10% of your earnings, I'd propose an investment of more than 20%. The more you invest, the better and that's why people who have learned this secret invest up to 50% of their income.

To make it easier to invest, treat investments the same way you treat any other bills or expenditures. Incorporate investing into your monthly list or budget, just like phone bills, utilities, or a car loan. Remember that your investment bills need to be given the first priority.

How Do You Invest Your Money?

Let's face the facts. It is an exercise in futility, depending on a savings account. This is because the majority of savings accounts have an Annual Percentage Yield (APY) of 0.05% to 2.5%. Keeping in mind that the average annual inflation rate is 3.1% or thereabouts if you invest your retirement money in a savings account, you will lose money rather than increase it.

If you are lucky that your employer has a 401k plan that comes with a match, by all means, go for it as it is free earnings and cash deferred for that matter. Be cautious, though, if the 401k has a high expenditure ratio. But remember that if your employer matches your cent-for-cent, it is definitely worth it even if the fees are on the higher side.

Stocks, Mutual Funds and Bonds

Because of the intricacies involved in opening a brokerage account, it is not cheap or easy. Having said that, even investing in individual stocks as a retirement option is not recommended due to the high risk associated with them.

Your best bet would be index funds, for instance, the Vanguard Total Stock Market Index and ticker symbol $VTSAX. This is because these funds mirror the stock market, and it highly diversified for long-term investments.  Also, its expense ratio is not that high.

Besides that, if you prefer a more traditional or conventional approach, you can opt for index funds that constitute both stocks and bonds. Though, it is not advisable to be too conservative in your 30's.

The fact that you are not going to retire soon gives you the freedom to be more aggressive, and you can handle the volatility and unpredictability of the market better than a person due to retire soon. It is noteworthy that a few mutual funds have time and again outshone the S&P. Nevertheless, similarly to 401k, they can have high rates that will swallow lots of money in the future. So it pays to be cautious.

 With a 401k at your disposal, plus a strong index or mutual fund, early and satisfying retirement is possible. This is more so if at least 20% of your income is being invested. If all this seems overwhelming or confusing, a financial advisor can help you out.

Investing In Property

The creation of significant wealth is possible by purchasing and holding real estate. This is especially if you buy a property and lease it out. In such cases, the person renting the property pays off your mortgage, and the real estate increases in value. This contributes considerably to your net worth.

The disadvantage of this is the risk involved and uncooperative tenants. But this can be remedied with a credible and professional real estate agency and serious vetting of tenants.

To get approved for cash flowing real estate unit, the barrier to entry can be too high. In a typical setting, you will need 20% to 25% initial down payment, not to mention all the initial maintenance and restoration fees. Before making any move, make a date with a licensed and experienced real estate practitioner to avoid making the wrong choices.

4. Spending Unwisely and Lack of a Budget

Most people blew money in their 20's like there is no tomorrow! However, fun it might seem, this is risky and reckless behavior. It is advisable to keep track of every coin that you earn and spend.

In this tech-savvy age, you don't have a reason not to do that. You can use free apps such as Personal Capital and Mint, in addition to Excel sheets. With such apps, you can easily record your financial transactions and check your income, spending, assets, debts, and net worth. Without keeping an eye on the mentioned aspects of your financial life, it would be pretty hard to use a budget, let alone stick to one.

By creating a plan and following it religiously, you have the best chance to incorporate 20% of your earnings into investments. This will also enable you to know what bills to do away with or reduce. Case in point; you can reduce your insurance, phone, and cable bills and then invest the difference. Spending unwisely can lead you to having to contemplate using a Chapter 7 Means Test Calculator or Chapter 13 Calculator to pursue bankruptcy.

5. Getting Life Insurance When it is Too Late

It's funny that life insurance might be absent when needed, so it is in your best interest to get life insurance before time runs out.It is vital to note that life insurance isn't for you; rather, it is for your loved ones. In the event some misfortune befalls you, you will rest assured that your absence as the breadwinner will not negatively affect your family, and they will be taken care of.

Life Insurance Can Be Pretty Affordable

The best way to give expensive life insurance in the future a wide berth is to get it now or today! Do you know that life insurance rates are based on your health and age? Well, now you know, so it is high time you got insurance while you are healthy and young. Furthermore, we don't know what tomorrow could bring.

Term life insurance is the easiest to understand and can be the least expensive, according to Nerd Wallet. This entails having a policy that runs for a pre-agreed period, say 20 to 30 years, and after the period elapses, the policy ends. If you were keen to adhere to the advice in step 3 and invested well, in 20 to 30 years, you should have enough money to be self-insured. You will no longer need life insurance as you will have tons of cash in your investment accounts.

You are advised not to go the permanent life insurance or whole life cash value way. Just because these methods grow interest and builds cash value, insurance salespeople might tell you it is the best option in the market.

This is not true and just so that you know, terming life insurance as an investment is wrong because it is not an investment. Note that these policies are absolutely expensive with an inferior return on investment in the majority of cases.

To ensure that your future is well taken care of, buy term when in your 30s and invest the cash you have saved. Avoid having a permanent package in a mutual or index fund. It pays to speak to a licensed and credible financial advisor or insurance agency. To be on the safe side, ensure that they have your best interest at heart and that they are not just after a hefty commission, in addition to selling you an expensive policy.

6. Allowing Your Career to be Stagnant

For many people, their 20's is the culmination of their careers. Having started from the low rungs, they are now scaling new heights. But this is not enough reason to be comfortable with your position and stop aiming for more significant achievements in your 30's.Sadly, many people fall into this trap. They reach great strides in their careers while in their 30's and are comfortable staying with the same employer for the rest of their working years and in the same position.

To make matters worse, you get inconsequential 2 to 3% annual pay hikes that are just enough to help you cope with inflation. So, in a nutshell, it is not a promotion per se because of the presence of inflation, which you have no control over. Picture this – What if getting a substantial salary increase or climbing up the career ladder is within your reach?

This could translate into a considerable difference in your age of retirement, your entire retirement sum, and change the quality of life as retirement approaches.

In case your boss is pretty decent and looks after your interests, there is no reason to move jobs. There might be a chance to progress in your career, both in the financial and professional sense. In this regard, talking to your employer is a good idea, and if this fails, it may be time to look for a new job. I know that this is a pretty sensitive topic for many people who have invested lots of time and energy in their jobs. But if you examine the situation critically, it beats logic staying where you are not compensated well for your skills and contribution.

People have grown incredibly tech-savvy, and there are websites where you can check the average salary for someone with your qualifications, location, and experience. If you notice a disparity in the pay, it is your responsibility to make further inquiries. These sites include Indeed and Glassdoor. Besides, it is advisable to compare your job title vis-à-vis the length of experience that you have. Also, examine the job titles of professionals with the same job title as yours. It may be that you were overlooked during promotions, and that's the explanation of why your salary doesn't match your experience.

7. Purchasing a Car and House When You Cannot Afford Them

Most people in their 30's like to keep up appearances by living in exclusive gated communities, plus having a couple of highly-priced vehicles. Others take it a notch higher and acquire boats! Sadly, all this is always for show and an attempt to keep up with the Joneses. These people that seem to have it all are in reality deeply in debt and in some cases, it becomes a challenge to get out of this debt.

This also makes saving an added challenge too. I can confidently say that only a handful of people in their 30's are free of debt and on the path to financial freedom and early retirement. Ensure that you avoid this trap when in your 30's. Even if banks are lining up to help you buy what you cannot afford, make sure you avoid this pitfall.

Most car buyers will part with roughly $523 as a monthly payment for cars

Experian states that in 2018, new car buyers had to part with an all-time high monthly payment of $523 in the first three months. New car buyers also got loans averaging a groundbreaking $31, 453. What makes it even more spine-chilling is that banks and carmakers are in 2018 offering longer repayment periods of up to 72 to 84 months (6 to 7 years).

Due to the ever-increasing prices of automobiles, these longer repayment terms are put in place to make the cars affordable. Unfortunately, though the monthly payments might be on the lower side, the interest is off the charts. This translates into huge profits for the banks but losses for you. Most financial gurus advocate that the entire auto costs should be below 15% of the pay you take home. In addition, stay away from a car loan that runs for over 48 months.

Case in point: If you take home $3,000, then your auto payments should be around $300. Besides that, additional car expenses, including fuel, insurance, and repairs, should gobble around $150. So taking into consideration the 15$ advice, $3,000 x 0.15=$450.

A typical American new home costs around $395,000 to build

The majority of financial advisors are in agreement that no more than 1/4 of your take-home salary should go into paying the mortgage. Simply put, if, for instance, your take-home earnings are $3,000 every month, then the mortgage amount should not surpass $750 every month.

 It goes without saying that even in the aftermath of the 2008 collapse, and the restrictions that came with it, some bankers still allow people to surpass the 25% mark. Unfortunately, most people will almost always settle for the highest amount that the bankers will allow, and this is way above the amount that financial logic dictates they should borrow. According to the numbers, the recommended rate for a car loan (expenses included) is 15% of the take-home income, while for a mortgage, it is 25%.

Well, we are already at 40% of the take-home earnings just for the car and house. After you invest at least 20% of the remaining 60%, you will leave 40% for food, miscellaneous bills, and entertainment.

If your take-home sum is $3,000, $450 will cater for car payments with expenses included, $750 will take care of the mortgage, and around $600 from the remaining total of $1,800 will go to investment. This leaves $1,200 for the remaining needs, wants, and luxuries. According to your take-home salary, adjust these figures to see where you fall, and you might be shocked.


Unfortunately, it is human nature to spend almost everything we earn. Typical people in their 20’s and 30's have around 30% to 35% as their car loan, 35% to 45% as a mortgage, and invest 10% or even less of their take-home salary.

Funnily enough, even if the earnings increase, we also increase our spending! It is about time that this behavior stopped. Let's say that at the moment, you are above the recommended amount on your mortgage or car payments. The best advice would be to look for an extra source of income that will make the payments easier to bear or do away with the expensive cars and houses. While each scenario is different, it should be used as a pathway to financial freedom.

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