Avoid mistakes like these and your bankruptcy will become a distant memory. Thanks and a tip of the hat to the bankruptcy network.
Mistake 1: running a monthly balance on your credit cards. Credit card companies charge between 15% and 28% interest on monthly balances. By contrast, mortgage loan rates are around 4% and car loans are around 2% to 6%. Banks pay depositors just over 1%. Interest rates at 15% plus will cost you hundreds or thousands of dollars. 14% or higher is loanshark territory.
Look at the credit card interest calculator here and plug in whatever numbers you wish. I plugged in 25,000 at 14% interest and a minimum payment of 2% of the balance each month. In this scenario, it would take over 31 years to pay off the $25,000.
Credit card debt is a major component of most bankruptcies. If you can’t pay off your balance each month, you are spending more than you can afford and this problem will not magically disappear. It will lead you back into bankruptcy.
As a practical matter, once your running balance reaches $8,000 to $10,000 you will most likely never pay it off.
Instead of using a credit card, use a debit card that withdraws funds from your checking account immediately. Debit cards have a way of minimizing impulse purchases.
Mistake 2: not recognizing the total cost of a purchase. We see this in auto loans. The auto loan maybe $325 per month but the total cost of ownership maybe $650 or more when you factor in fuel, insurance, tires, service, repairs, and other associated costs. Further, an accident (unexpected) may cause insurance costs to rise and may give rise to repair or rental car expenses.
Real estate purchases also result in extra expenses. Property ownership always results in unexpected expenses, in addition to normal expenses that you would not see as a renter. When you budget for a home purchase, assume that you need to budget several hundred dollars each month for repairs and maintenance.
Mistake 3: Not using a budget. We suggest that you prepare a budget. More often than not, this budget represents the first time that you may have looked at your family’s income and expenses in black and white.
Budgets help you understand where you are spending money and often where you can cut back. Business owners know that you can’t change what you don’t measure and the same holds true for individuals. You should aim for a budget that results in some level of disposable income (which you can allocate to a savings account or retirement plan).
Mistake 4: Not preparing for retirement. If you are relying on Social Security to fund your retirement years, you are asking for trouble.
In most cases, Social Security retirement will pay you enough to live at the “Poverty +” level. Everyone should be putting money away – even $100 per month. Most retirement plans have favorable tax consequences so every dollar you put away will benefit you.
Squeezing $100 or more from your budget may be painful but you should see this type of contribution as a necessary investment – just as necessary as paying for electricity or car insurance.
Mistake 5: cashing out a retirement plan to pay credit card or other debts. Most retirement money is protected from claims by creditors. With very, very limited exceptions you should never tap into retirement money because these funds will almost never be at risk.
If you are tempted to encroach upon retirement money, talk to a lawyer first so she can talk you out of this bad idea.
Mistake 6: failing to buy insurance. No one likes to spend money on insurance because you are buying protection against events that may never happen. No one expects to be diagnosed with a debilitating disease or injured in an accident but every year people end up facing the unexpected.
Insurance is another necessity that should come before “wants” like that new TV or cosmetic improvements to your house.
All of these mistakes or “exposure points” may seem like common sense, but most of these problems are very common among bankruptcy filers.
You can look at this another way – intentionally do the things I call mistakes and you will almost certainly end up in or close to bankruptcy. The good news is that these types of mistakes to avoid are not moral failings; they represent poor planning and a lack of basic financial literacy.
There are dozens of books out there and plenty of free online resources. Google “basic household budgeting” and you will see dozens of entries. Spend a little time improving your financial literacy and your quality of life will improve.
Carolyn Secor P.A. focuses its practice in the areas of Bankruptcy and Foreclosure Defense in Clearwater, Florida. For more information, go to our web site www.BankruptcyforTampa.com or call 727-334-0729.