Top 8 Budget Tips to Avoid Bankruptcy
Financial strain impacts every aspect of your life. It affects your sleep, your work performance, your relationships, and your health and well-being. If you’re reading this because you’ve begun to research bankruptcy advice or investigate the benefits or drawbacks of bankruptcies, you’ve just taken the first major step toward regaining control of your finances. To reward your bravery and to help you take proactive measures to avoid bankruptcy, we’ve compiled 8 simple and effective budget tips from leading financial advisors.
1. Get Organized
Organizing your finances is not as difficult as you might think. Your first task is to collect all the receipts, statements and pay stubs that you can find. These are the same materials you will have to bring to your credit counsellors and bankruptcy lawyers if you choose to seek their support and guidance. But first you have to get your financial house in order to get on the fast-track to debt repayment. The goal here is to find out what you really earn, and uncover where that money is being spent.
2. Live Within your Means
On paper, it might appear that you can justify treating yourself from time to time, but are you spending more than you earn? The average salary of a full-time, minimum wage employee in the US is around $15,080.
The harsh reality is that a growing number of good, hard-working people are losing their homes, personal property and assets to foreclosures, repossessions and bankruptcies because they did not know their financial limits and failed to live within their means. In 2010, the number of home foreclosures in America increased by 35%.
How do you whip your finances into shape without risking it all? It’s simple: track your spending habits. After you pay your bills each month, how much do you have left over? This is a figure that most of us grossly overestimate because we forget about the other costs nibbling away at our income. Cell phones, car fuel, home heating costs, groceries, eating out, pocket money, entertainment, and even our daily coffee or snack add up to hundreds of untracked dollars spent. If you don’t know how much money you really have left over at the end of the month and are trying to avoid bankruptcy, a budget is the key tool that will work in your favor.
3. Accept that a Budget Works for You, Not Against You
Society gives the budget a bad rap. What you should know is that a budget will do more to set you free than to limit your opportunities.
Creating a monthly budget and sticking to it will be your single, strongest tool for living within your means, achieving your financial goals and staying out of the bankruptcy lawyer’s office. The reason budgets are not restrictive is because they put you in complete control of the direction your life is headed.
Though you will gain insight into your priorities and financial obligations, you may discover that you cannot comfortably, or even responsibly, afford elements of your lifestyle that you’re accustomed to. This can be upsetting, but because you’re determined to be free of debt, it will be easy to adjust your expectations.
Not sure what exactly goes into a budget? Our next bankruptcy-proof budget tip will help you perform damage control and achieve a debt-free future.
4. Put Your Budget to Work
Below are the four primary expense categories that should appear in your budget. Organizing your expenses this way makes it easier for you to track your monthly spending habits and budget to avoid bankruptcy.
- Fixed Expenses:
- Mortgage, rent, condo fees, property taxes, home/ vehicle/ medical insurance, utilities, heating costs
- Your entire household budget each month should not exceed 32% of your net income.
- Your maximum rent expenditure should not exceed 25% of your income.
- Your maximum mortgage expenditure should not exceed 30% of your income.
- Incidental Expenses:
- Repairs to home or vehicle; cost of gas, parking, taxis, or public transit; grocery expenses, cleaning supplies, pet food; child care; spending money and allowances; clothes, shoes, gifts; tobacco and alcohol expenses; medical and personal care expenses
- Debt Repayment:
- Repayment of student loans, car loans, lines of credit, consumer credit
- Your Total Debt Service Ratio should not exceed 40% of your Net Worth.
- Retirement savings, education savings, emergencies, medical costs and the unknown
- Your recommended minimum savings goal should not be less than 10% of your income.
5. Compromise and cut unnecessary expenses
When budgeting to avoid bankruptcy, you have to commit to cutting expenses. Take a look at the following list of common (and sometimes non-essential) expenses. Experts advise that your top 3 areas of spending on this list are the places you need to cut back.
- Entertainment: This includes dining in restaurants, attending movies, going for drinks, memberships to clubs and gyms, to name a few.
- Clothing: Choose alternatives to brand name clothes, shoes, jackets that fit and are appropriate for the climate.
- Groceries, meals, snacks: Consider alternatives to your daily coffee habit, take-away work lunches and snacks, and paying full price for grocery items.
- Transportation: Public transit is smart, efficient, and cost-effective compared to the costs of owning and maintaining a vehicle or throwing money away on cabs.
- Beauty products/ makeup: Drugstore brand personal hygiene and grooming products are a pleasant, cost-effective alternative to department store prices.
- Rent: You may need to downsize, get a roommate.
7. Pay Down Your Debts
- Make a payment schedule that chips away at your principal. Paying interest only prolongs the repayment period and can add thousands of dollars to the total cost.
- Contact your credit card companies and request that they lower your interest. You’re reclaiming control, so be persistent.
- Consolidate your credit cards. You can do this by transferring the balance of your other credit cards onto the card with the lowest interest rate. Cut up the old cards.
- If the above steps do yield results, seek credit counseling and bankruptcy advice to help you choose an effective debt repayment program.
- Take on a second job, ask for a raise and increase your work hours, as required.
8. Get Expert Bankruptcy Advice
If you decide to seek relief under the Bankruptcy Code, bankruptcy lawyers can help you navigate with confidence through the various chapters of the Bankruptcy Code. You may file a petition for relief under the most appropriate chapters of the Code, depending on your circumstances. Title 11 contains nine chapters, six of which provide for the filing of a petition. The other three chapters provide rules governing bankruptcy cases in general. Your bankruptcy case will be referred to by the chapter under which your petition is filed.