Some people file for bankruptcy under the delusion that doing so will solve underlying budget problems. These people often return as repeat bankruptcy filers. Are you at risk of falling into the cycle? Here’s one very simple question you can ask yourself:
Do I find myself struggling financially, despite not having to pay credit card debts, loan debts, medical bills, etc. anymore?
If the answer is “yes”, you are going to find yourself filing for bankruptcy again unless you act now to fix the problem. As much as we love your business, nothing personal, but we really don’t want to see you back in our office as a repeat filer if we can help you prevent it.
Step 1 – Prioritize
Some things are more critical for survival than others. Have a well-grounded sense of what qualifies as a “need” and what qualifies as a “want”. Food, clothing, shelter, health care, and transportation – those are needs. Learn how to discipline yourself and cut excess baggage when you are struggling to make ends meet. If you cannot afford to feed your family, it’s time to ditch your satellite television service.
It’s okay to indulge in some luxuries, but not at the cost of being able to provide for the well-being of you and your family. Do not rely on credit to make ends meet just so you can enjoy creature comforts – you’ll wind up back in the same hole you just dug yourself out of.
In most cases, you will find you can afford all of your basic needs and at least some of your wants. How many luxuries you can afford depends on your income. Which ones you can afford depends on your priorities.
Even within the realm of basic needs there might be room for savings. Instead of dining out at restaurants, cook your own meals at home. Buy store-brand products rather than name-brands. If you’re living in a $200,000 house, perhaps your family will fit comfortably in a $100,000 house. Carpool to save money on fuel. Skip on designer clothing – your kid does not need to go to Abercrombie and Fitch for back-to-school shopping.
One of my pet peeves that I frequently encounter when budget-planning with my clients is charitable contributions. I mean no disrespect to people’s religions and their tithe requirements, but let’s be responsible. If you are struggling to pay your legal obligations, charity should not be in your budget. You can’t help others when you can’t help yourself.
Step 2 – Prepare for a Rainy Day
For many of you, the catalyst that ultimately caused you to file for bankruptcy was a string of unfortunate events. You might have been laid-off from work, perhaps incurred massive medical debts from an illness or injury, or perhaps your car decided to kick the bucket.
These tragedies happen to everybody. It may seem that it happens to some people more often than it does others, but nobody is immune from bad luck. It’s foolish to go through life, paycheck to paycheck, believing that no disaster will ever throw a curveball at you. It happens to the best of us. The question is: will you be prepared for it?
The vast majority of you with a savings account keep only the minimum balance in it. You have a savings account – use it! If you are paid bi-weekly, you can save up over $1,000 per year just by setting aside $38.50 from each paycheck. Keep this account as an emergency source for funds, to be used only for major medical or vehicle expenses, or as a temporary back-up source of income if you lose your job. Avoid tapping into it except as a last resort, and always attempt to repay yourself when you can afford it. The greatest thing about lending yourself money – no late fees, penalties, or interest!
Step 3 – Prepare a Budget & Balance Your Accounts
Examine your income. Look closely at your gross income. If it often includes overtime, figure out what your base wages are, and how much of that overtime, if any, is reliable. Do not bank on money that you cannot rely on. Examine your deductions. Do you often get a large tax refund each year? While it might be a nice nest-egg to have, consider consulting a tax professional and adjusting your withholding if you’re struggling to make ends meet. You will also want to look at some of your optional deductions, like life insurance and 401(k) contributions. Both of these things might be good to have, but you may need to temporary suspend these contributions so you can afford to live.
Map out your expenses. They can be split into three categories. The first is “fixed amount expenses”. These are expenses that occur on a predictable and routine basis and cost the same each and every time. Examples include rent/mortgage, auto payments, insurance premiums, student loans, child support, subscriptions, and certain utilities.
The second category is “variable amount expenses”. These are expenses that occur on a predictable and routine basis, but the cost varies based on consumption. However, past experience will guide you on approximately how much money you will need to budget (always round up when budgeting your expenses, to give yourself a cushion). Examples include groceries, clothing, most utilities, fuel, entertainment, personal grooming, household supplies, and prescription medication.
The third category is “unexpected expenses”. You know they’re going to pop-up, but you don’t know when, nor how much they will cost. The two primary examples: medical and vehicle expenses. These are expenses for which a rainy day savings account comes in handy.
After you set-up your budget, keep a very detailed transaction log of your bank accounts. Track what you spend your money on and when you spend it. After each of the first four to six months, compare your transaction log and your budget. You might be spending more money than you realize or budgeted for, and you may need to make some adjustments when that reality sets in.
The cold, hard truth is that there will be certain things you cannot afford. Indulging in luxuries is okay, even healthy. But your expectations need to be realistic. If you have the attitude that you’re going to buy whatever you want whenever you want it, regardless of your financial ability to pay for it – that’s just downright irresponsible. Your disdain for credit card companies and lending practices does not excuse you from paying your debt, and you will garner little sympathy for having such an attitude.
Step 4 – Use Common Sense
If something sounds too good to be true, it is. You’re in a capitalist market where everybody is out to make a buck. There are no free lunches, and so you need to be aware of the underlying goals behind every sales tactic. A smooth-talking salesman with an easy smile is no excuse for getting yourself into a bad transaction. Blaming someone else for your fiscal misfortune will not help you become a smart and responsible consumer. Here are some tips you can use to empower yourself:
Beware of hidden fees and charges. When something is advertised as being $39.99 per month, you need to know what the base services are that the $39.99 just bought you. Frills will cost more.
Be cognizant of taxes, shipping, and handling. Batteries are often not included.
If you miss a payment, do not be astonished that your interest rate spiked! Your low interest rate is a reward for having good credit.
Your 0% interest for 12 months is only good for 12 months. Care to guess what happens on the 13th month?
Warranties are a good indicator of how long the product is expected to last.
If you need a $5,000 loan, do not take out a loan for $10,000 just because you are approved for it.
Consider your debt to income ratio. If your monthly payment on the loan represents more than 15% of your monthly income after taxes, then exercise great caution and only incur the debt if absolutely necessary.
Avoid impulse shopping. Wait two weeks. If you still have to have it, then buy it.
Shop around. Vendors sell the same items for different prices. Some offer better financing options.
Learn the lost art of bargaining. Be willing to walk away empty-handed if the salesman is unwilling to work with you on your terms.
Be aware of the interest rate and term of the loan. A loan for $10,000 at 5% interest will cost you $11,322.60 over 5 years. The same 5 year loan at 20% interest will cost you $15,896.40. The same 5% interest loan will cost you $19,324.80 over 30 years.
Avoid cash advance or payday loans. Among all types of credit, these tend to have the highest interest rates – many of them are nearly 2000% interest (that is NOT a typo!).
Beware of adjustable rates on loan deals that sound like they’re too good for your credit score. As many sub-prime mortgage borrowers discovered, those interest rates do not stay low.
Coupons only save you money if you planned to buy the product before you found the coupon.
Package deals may cause you to buy more product than you actually intended to buy.
Avoid free gifts, sale prices, and other marketing gimmicks that require you to first buy something that you had not intended to buy originally. These are gimmicks to lure you into a store and purchase other things that are not on sale.
Outsmart the commercial. Try to figure out what they’re not telling you. It’s a fun game and a good source for laughs.