Filing for bankruptcy can be the first step towards reestablishing financial security, but it is not a decision that should be taken lightly. Filing for bankruptcy can temporarily damage your credit rating and close off some opportunities. However, most people have already damaged their credit prior to filing for bankruptcy, in which case the bankruptcy helps them to start improving their credit. Even though bankruptcy is an effective tool, it’s much better to avoid being in a position where you have to file in the first place. Here are a few budgeting rules to help you manage your finances and avoid bankruptcy.
Budget. Creating and sticking to a budget is the single most important thing you can do to improve your financial security. Honestly and meticulously listing all of your monthly expenses vs. your monthly income will help you to determine if you are living within your means. If not, eliminate any unnecessary expenses to put your finances back into the range of what’s affordable for you. Make paying off debts quickly a priority to give you additional leeway in your budget. Religiously following your budget is the best thing you can do for your financial future.
Use Cash. Paying with cash or a debit card when making purchases or paying bills can help you to make sure you’re not overextending yourself. Avoid the unnecessary debt associated with credit cards that can carry a high interest rate and are difficult to repay. This will also free up your credit cards for emergencies.
Pay Bills on Time. Making even one late payment can upset your entire budget. Most credit card companies will drastically increase your interest rate over even one late payment. This will in turn increase your monthly amount due and make it more difficult to repay the debt. For most people, their mortgage or rent payment represents the bulk of their monthly expenses, and it can be nearly impossible to make up missed payments. Falling behind in one of these payments can put you permanently behind.
Prepare for Emergencies. No matter how well you budget, emergencies are bound to crop up from time to time. People get sick, things break, and accidents happen. Credit cards can be used to help you out in a pinch, but it’s much better to be prepared so you don’t have to exhaust your credit in an emergency (and pay interest on it later). Carrying health, homeowners/renters, and automobile insurance will be an added monthly expense, but will be well worth it when you need to use them. Having a savings account will also help you to meet problems head on. Even having as little as one month’s worth of expenses in the bank can make all the difference in times of crisis.