Things That Could Bankrupt You and How to Prevent Them
Saturday, August 3, 2019, 6:00 AM | Leave Comment
Nothing in life is certain, but when it comes to finances, you can take steps to prevent going bankrupt by avoiding risky purchases and situations.
Filing for bankruptcy is an event that you want to avoid if at all possible.
Bankruptcy can have unexpected consequences, such as affecting job promotions and opportunities.
And even if you feel that you’re financially secure, an unexpected job loss or illness can quickly change your circumstances.
Some of the common events that can lead to bankruptcy, like unemployment and job loss, can’t be prevented, but other common causes of bankruptcy are fully preventable.
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Buying a New Car
Buying a new car is a major financial purchase, and you may find yourself in financial trouble if you make a poor choice in your new vehicle. Car dealerships are full of shiny new cars, incentives, and the promise of easy financing, but dealerships may approve you for more financing than you can really afford.
When considering a new car, sit down and calculate out what the monthly payments will be and see how they fit into your budget. Don’t forget to account for insurance, registration, taxes, and other fees.
If you start to miss car payments, your credit will be negatively affected. With a lower credit score, you may not qualify for other loans or credit, or you may be given loans at higher interest rates, costing you more money. If you miss too many car payments, your car may be impounded, leaving you without a vehicle and with a bad credit score.
When buying a new car, determine your budget before you go to a dealership. Depending on what you can afford, you may want to consider purchasing a used vehicle or exploring a lease. Be sure to read all contract language and have any used vehicle you’re considering inspected by a mechanic before buying it.
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Buying a Home Without Adequate Savings
Many people dream of owning their own homes, but if you purchase a home without adequate savings, you can quickly find yourself in financial trouble. It’s important to purchase a home that’s within your budget and to save up money for unexpected maintenance or repair expenses, like the need to replace a roof.
If you fall into the trap of putting off standard home maintenance because of its cost, you will probably end up paying more in the long run. Winter home maintenance tasks like winterizing your water lines or sealing up your ductwork can’t be neglected, since they can help to prevent more expensive home repairs.
When planning to purchase a home, set aside a home expense fund to help cover expenses like maintenance and repairs.
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Relying on Credit Cards
It can be all too easy to put money on a credit card when you’re a little short on cash. The problem with having credit card debt is that interest can rapidly accrue, especially if you’re only making minimum payments toward your balance. The average credit card interest rate is 14-20% depending on your credit score, and it can make your debt grow faster than you can keep up with.
If you’re going to open a credit card, look for one with a low interest rate and, ideally, a no-interest introductory period. Try to only charge items that you can pay off in full within a month so that you can avoid paying interest. Though it may be tempting to run up a balance to earn points, keep your credit card spending in check and think twice before you charge a big purchase. Bankruptcy can change your life and it’s difficult and frightening to have to dig yourself out from under too much credit card debt.
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Taking Financial Risks
You can’t eliminate all of the potential situations that could leave you bankrupt. After all, the loss of a job, a significant health issue that keeps you out of work, or even a car accident that leaves you needing to quickly replace your vehicle are all situations that you can’t really avoid. But, you can take steps to minimize the damage they could have on your finances.
Living without a budget or without an adequate emergency fund increases your risk of going bankrupt when something in your life goes wrong. Implement a monthly budget to keep your spending under control. Track your spending for a month and identify areas where you can cut down on your spending, such as by eliminating that coffee you buy at a drive-through each morning on the way to work. These little expenses can add up, and sticking to your budget can help you to make wise decisions with your money.
An emergency fund is also essential. Open a free savings account and use this as your emergency fund. Don’t touch these funds for any reason except in an absolute emergency. To build up your emergency fund, consider depositing a percentage of each paycheck into the account.
If you can eliminate some unnecessary spending through your budget, you could also put these extra funds into this account. Hopefully, you won’t need to dip into the emergency fund for years to come, but it can help to keep you out of financial trouble when unexpected situations do arise.
If you do find yourself running out of money and considering filing for bankruptcy, try to find an alternative. When facing the worst-case financial scenario, work with a reputable credit counseling service and consult a financial advisor to navigate this difficult time. Once you’re back in a more stable situation, implement the budgeting and emergency fund advice above to help reduce the chances that you’ll ever face bankruptcy again.
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