For most people who find that they have to file bankruptcy, there’s been some kind of life changing event. A life changing event can be a catastrophic illness or accident, the loss of a job, the death of a spouse, a divorce or any major event that you obviously can’t control. Fortunately, bankruptcy can be a valuable tool to help you manage those life changing events.
You can manage your finances in a way that will help you avoid difficult financial situations and eliminate any chance that you will ever need to file bankruptcy, possibly even in the face of a life changing event. Here are the 5 most important rules for avoiding bankruptcy:
1. Save 15% of your income. The best way to begin saving is to be realistic about your budget and what you are spending every month. Keep track of every penny for 30 days and with that information, begin to look for ways you can shave down expenses. The internet is a useful tool for learning how to budget. It can be painful at first but it’s a skill that is invaluable and will last a lifetime.
2. Don’t just save 15% of your income, invest it. Stashing money into a savings account earning less than 1% in interest is little better than putting the money in your mattress. You need to put it in an account where it can work for you and earn interest. I suggest a no load (meaning minimal management fees), Roth IRA to start with. You can put up to $5,500 (that’s $11,000 for a married couple!), in a Roth IRA and you can withdraw the money you’ve put in if you need it, without penalty! These are just a few of the benefits of a Roth IRA. You can find lots of good information on the internet. Also, IRAs ARE PROTECTED IN BANKRUPTCY AND FROM JUDGMENT CREDITORS IN NORTH CAROLINA!! This means that even if you have to file bankruptcy or you get sued by a creditor, your IRA is protected.
3. Live within your means. This should be self-explanatory. The best way to achieve this goal is to set a budget and stick to it. Make sure you pay yourself first by investing 15% of your income off the top and then you’ll be less likely to miss the money. Again, there is a lot of good information on the internet about budgeting. Almost everyone has access to the internet. If you don’t, go to your local library, they generally have computers that are available for the public to use. Go educate yourself about budgeting. That is the most important investment you can make!
4. Don’t accumulate debt. Again, this should be self-explanatory but it seems that I find myself repeating this mantra again and again. Be really truthful about what you need versus what you want. If you can’t pay for it with cash, don’t buy it unless it’s an absolute necessity. This rule also goes hand in hand with Rule #3. If you are living within your means as a rule, you won’t buy something you don’t need! Finally, if you do accumulate debt, pay it off as quickly as you can so you can get back to saving money. Don’t liquidate retirement accounts to pay off unsecured debt! Remember, most retirement accounts are protected in bankruptcy and from judgment creditors in North Carolina! Pick the debt with the highest interest rate and start paying it off.
5. If your employer offers a retirement plan, take it and max out your allowable contribution. This can be a 401(k), a Roth 401(k), a 403(b), a 457 or a SIMPLE retirement plan. Any kind of tax-deferred compensation plan is an excellent investment opportunity. Always max it out, that means put as much money into it as you can. At the very least, put in the max amount to get your employer match, if they provide one. That is free money! Don’t leave it on the table!
If you can begin to follow these rules, you will likely never have to make a life decision based on how it will affect your bottom line. Remember you can’t control everything that life throws at you, and bankruptcy can be a priceless tool in the event of a catastrophic situation. However, if you follow these rules, you will be much better off financially whether or not you ever experience a life changing event.