Focus, dedication, and hard effort are necessary to become wealthy. The path to wealth is arduous. On the other side, going bankrupt is a pretty simple process. very simple In fact, the majority of us are likely only one setback away from it.
But the good news is here. You may position yourself to stay clear of these problems by being proactive. The fastest ways to go bankrupt are listed below, along with what you may do to prevent them.
1. Living in an Unaffordable Home
Many people believe that paying rent to someone else is a waste of money when you could use that money to make a down payment on your own home. This method of thinking is wise. However, you need to exercise caution in your approach. Many people believe that if they can afford a $1,000 monthly rental payment, they can also afford a $1,000 monthly mortgage payment. Sadly, this is not the case. A decent rule of thumb is to round up your rental payment by 40% to get an idea of how much your monthly mortgage payment will be. That is to say, if your total monthly housing costs are $1,400, do not agree to a mortgage payment of $1,000 every month.
2. Lack of an emergency fund
Additionally, being frugal enables you to accumulate an emergency fund. If you don’t have an emergency fund, a sudden need may compel you to borrow money or use all of your credit cards. Then you have to spend money on exorbitant interest.
In the event that you lose your work unexpectedly, an emergency fund is a pool of readily available funds that is equal to three to six months’ worth of wages. And during the past year, millions of us have experienced sudden job loss.
In addition to receiving up to 50 times the standard national interest rate on your savings balance when you sign up for the Aspiration debit card, you may receive up to 5 percent back when you swipe at specific retailers.
3. Purchase of a New Car
Even though only a small percentage of consumers can afford to pay in cash, millions of new cars are sold each year. However, being unable to pay cash for a new car can also indicate that you cannot afford it. After all, having the money to make the installment is not the same as having the money to buy the car.
Additionally, by taking out a loan to acquire a car, the buyer is paying interest on a depreciating asset, which enlarges the gap between the car’s worth and the amount paid for it. Even worse, a large number of people trade in their cars every two to three years, losing money each time.
A person may occasionally be forced to obtain a loan in order to purchase a vehicle, but how many people actually require a large SUV? Such cars cost a lot to acquire, insure, and fuel. Unless you need an SUV to make a living or you tow a boat or trailer, buying one might be costly.
Consider purchasing a car that uses less gas, is less expensive to insure, and requires less maintenance if you need to buy one and/or borrow money to do so. Because cars are expensive, if you purchase more than you need, you can be wasting money that could have been saved or applied to debt repayment.
4. Choosing unwise investments
An important tactic for increasing your wealth is investing. But you can make so many poor financial decisions!
Watch out for multi-level marketing tactics, for instance. Direct sales businesses might give you the chance to go it alone while benefiting from a well-known brand. However, the MLM business model is easily exploited by fraudsters, so do your homework before enrolling and paying any initial costs.
Using an app like Robinhood is a more simple way to invest. You can start there whether you have $5, $100, or $800 to spare.
5. Debt Repayment Using Savings
If your debt is costing you 19 percent of your income but your retirement account is earning 7 percent, you might believe that switching the retirement for the debt will allow you to keep the difference in your wallet. But it’s not quite that easy.
It is quite difficult to repay those retirement savings, and you risk being charged exorbitant costs, in addition to losing the benefit of compounding. Drawing from your retirement account can be an option if you approach it in the proper way, but even the most diligent planners struggle to put money aside to rebuild these funds.
The pressure to pay back the debt usually disappears once it has been settled. It will be very tempting to keep up the same level of spending, which means you risk getting into debt once more. Living as though you still have a debt to your retirement fund is necessary if you plan to pay off debt with savings.
6. Spending money on interest on credit cards
Due to the high unemployment rate, more and more Americans are experiencing financial hardship and are using all available credit on their cards. The interest rates that these cards charge you can rapidly exceed 20% and will steadily consume a large portion of your income, preventing you from ever becoming financially independent.
However, a website by the name of Fiona might be able to assist you to pay off that account as soon as tomorrow and stop making those absurd interest payments on your credit card.
This is how it goes: Fiona can help you find a low-interest loan that you may utilize to pay off all of your outstanding credit card balances. The advantage? Because there is only one bill remaining each month and the interest rate is so much lower, you can pay off your debt much more quickly. Also, this month’s credit card payment is waived.
Start by keeping an eye on the small expenses that quickly pile up in order to avoid the risks of overspending, and then go on to monitor the larger expenses. Whenever adding new debts to your list of obligations, consider your options carefully. Also, please remember that being able to make a payment does not necessarily equate to being able to afford the purchase. Finally, make saving a portion of your income and taking the time to create a healthy financial plan a monthly priority.