Common Mistakes That Lead to Bankruptcy

Let's talk about the quickest ways to go bankrupt (and how to avoid them). In 2022, we’re holding on to as many dollars as possible!

Building a fortune is a lengthy process that takes practice, discipline, and smart investing. Nobody becomes a millionaire overnight after all. Generally, very few in this world ever do. In contrast, going bankrupt is scarily easy for just about anyone. In fact, most people are a lot closer to being penniless than they realize.

The fact is, it only takes a few easy-to-make missteps to wind up strapped for cash and deeply in debt. The best way to avoid these common pitfalls is to be proactive and take back full control of your finances, one better financial choice at a time.

Here are some of the absolute quickest ways to become bankrupt— and what you can do to make sure it doesn’t happen to you.

Living Beyond Your Means

Living beyond your means is a dangerous game that we’ve all played from time to time. But if you let it become your way of life, you’ll be setting yourself up for bankruptcy in one of the quickest ways there is. Some examples of living beyond one’s means include being house poor, using every penny to move to your dream city, buying a car you can’t really afford, and overspending in general.

If you’re guilty of spending more than you can truly afford to (and sometimes, we all are), it’s time to get in the healthy habit of spending less than you make. Cutting back should start with building a budget and sticking to it.

Living Without an Emergency Fund

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If you’re living frugally, you’ll also be able to build an emergency fund. If you don’t have one yet, now is the time to get started. An unforeseen emergency can wreak havoc on your financial stability. Instead of being forced to max out your credit cards or borrow money that may take years to pay back, prepare for the unexpected.

No matter where you stash it, an emergency fund is saved up money that’s never too far out of reach. Ideally, you’ll want to put back three to six months’ worth of salary. Hopefully, you won’t lose your job, but in recent years, it’s happened to millions of Americans when they least expected it. In turn, it’s better to be safe than sorry, especially when you’re trying to avoid bankruptcy.

Not sure where to start? Here’s how to build your emergency fund in the quickest way possible.

Making The Wrong Investments

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Smart investing is one of the key ways to grow your money. Making bad investments is one of the quickest ways to go bankrupt. And since all investing comes with a certain amount of risk, you need to know what you’re getting yourself into before you go all in. Here are the top investing tips for 2022.

The possibilities for where and how to invest your hard earned money are endless. The trick is to not get overwhelmed or spend more than you can really afford. Start by simplifying the process and working with what you have. There’s a number of straightforward ways to invest.

For instance, easy-to-use, commission-free investing apps like Robinhood allow you to buy and sell stocks for free and without limits. You can also start small. You can invest $5, $100 or $500. So whatever you have to spare, that’s what you should start with. No more, no less.

Not Having (or Not Sticking to) a Budget

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Creating and sticking to a budget is one of the key ways to maintain financial stability and better prepare for unexpected blows to your bank account. With that said, you don’t have to throw all fun and fancy free spending out the window. You just have to pick the right budget.

For instance, the 50/30/20 method is an easy way to get your spending under control without making dramatic lifestyle changes. You take your total after-tax income every month and divide it in half. You will budget your essentials with 50% and then take the remaining 30% for personal spending and put 20% towards financial goals.

Your budget is one of the best tools you have to keep from going broke. So use it to your advantage. Before you decide which method is right for you, check out this breakdown of the best budgeting techniques designed with every type of spender in mind.

Maxing Out Credit Cards

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Spending money you don’t have is a slippery slope. Over the years and heavily due to spiking unemployment rates, more Americans have become financially strapped and strained. In turn, they’ve begun to max out their credit cards more than ever before. And as we all know, with credit card debt comes skyrocketing interest rates. The more those piling charges add up, the harder it can be for many to keep their head above water financially, often putting more of their paycheck towards paying off their credit cards than they’re ever able to get back. And breaking even can feel impossible.

If you’re struggling with credit card debt, it may feel like there’s no way out. But there are a number of things you can do to turn your situation around and avoid bankruptcy. For example, if you owe your credit card companies $50,000 or less, companies like AmOne will match you with a low-interest loan in order to pay off your balances. And yes, they’ll pay off all of them.

Consolidating your credit card debt and paying it off all at once will mean that you are only left with one bill every month; the loan they gave you. Not to mention, since personal loans tend to have lower interest rates, you’ll get out of debt significantly faster than if you were just paying off your credit cards until the end of time. So what are you waiting for? Find out if you qualify today.

Mortgage Debt

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There’s a common misconception that owning an expensive house (purchased on credit) equates to wealth. The reality is, as long as you’re living in your house (rather than renting it to someone else), you are reaping the benefits of its value. So when it comes to shelter, don’t lose sight of what’s really important.

According to various bankruptcy courts, shelter should always be prioritized over “the possibility of realizing a profit.”  And while you’re living in it, your house’s true value will be found in the home you make it into, not how much it costs. Buying a house purely for appearances will not serve you in the long run, especially if you can’t really afford it. To avoid this common pitfall, stay within your means and take your time. By purchasing a more modest house, you’ll be able to more realistically minimize the risk of foreclosure and/or bankruptcy.

And if you’re thinking about buying a home but worried you haven’t saved enough, here’s our guide to down payments for first-time homebuyers.

Student Loans

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Generally, student loans are not dischargeable in bankruptcy. With that said, those hefty monthly payments and their unwavering interest rates can make it significantly harder to meet your other financial obligations. Taking out a student loan may feel like your only option, but you should proceed with caution. If you take out a student loan that you won’t be able to pay back, you’ll wind up in a much worse position than where you started. The biggest danger lies in your interest rate. There’s nothing worse than watching a reasonably sized loan evolve into monstrous loan debt and only falling more and more behind.

If you have to take out a loan, be wary and choose your student loans wisely. Establish exactly how much you need to borrow and make sure you have crystal clarity regarding the terms.

Cars

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Cars are an expense that most Americans can’t get around. And the average car’s value depreciates overtime. So while you’re spending years making interest payments to own the car of your dreams, your car will likely be worth much less than it started out at by the time you get it paid off. That’s why it’s important to know the true cost of ownership to decide just how expensive your car really needs to be before you buy one. No matter what, a modest, reliable vehicle will help you steer clear of more financial problems than a sweet ride that’s out of your price range.

Taking on The Financial Problem’s of Others

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As the old saying goes, we can’t take care of others if we’re unable to take care of ourselves. Still, many people tend to take on the financial burdens or problems of other people even when they can’t afford to. If your friend or family member can’t seem to qualify for a lease, mortgage, or credit card without assistance, perhaps it’s not something they can really afford to do right now. Not to mention, paying you back in a timely manner may prove to be a problem for you both. Don’t let money issues become a problem in your relationship.

There is nothing wrong with helping loved ones in need. With that said, it’s important to assess who you’re giving your money to with an objective, discerning eye. Put yourself in the position of the lender. Is the person high risk? And are you really helping them or perhaps enabling them to spend money they don’t have when you co-sign? For those ready and willing to say yes without considering these things, it’s often an easy way for both parties to wind up bankrupt. No matter your financial status, paying for someone else’s financial problems may lead to some real problems of your own.

So when it comes to where your money is going, stay mindful.

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