10 Ways to Prosper and Avoid Bankruptcy
- Do not accumulate on high-interest credit cards. This sounds obvious but it is the Number 1 cause of personal bankruptcy. Basically, a credit card is a 21% loan. These are very, very dangerous. I saw a credit card advertisement several months ago; they said it’s smart money. I thought about that. Maybe it’s prestigious, maybe it’s convenient, but it’s not smart. It’s dumb money.
- Know your flow. That is, on a monthly basis, know and understand every month what comes in, and what goes out. A lot of people have chronically negative cash flow for many years and suddenly it builds up and they’ve got $30,000 or $40,000 on credit cards.
- Don’t spend too much money on housing. Don’t spend more than one-third of your take-home pay on housing. It’s tough to do in Southern California. We see people spending 50-60%, sometimes even 70% of their take-home pay on housing. That’s too much.
- Don’t spend too much on transportation. Again, this is hard to do in California. If we’re going out to do battle on the freeways, we need a pretty good car. But 20% of your take-home pay is what the experts recommend. I see people with $500 and $700, even $1,000 car payments. What’s the point?
- Keep your overhead low. It seems like the theme of the 1980s was make and spend, make and spend. Not the 1990s. Keep everything in a reasonable proportion to your income. Stay away from financing refrigerators and those types of things.
- Create two types of savings. The first type is six months of overhead. I call that the “drop dead money”. Basically, if your employer wants you to do something unethical, immoral, or illegal, you can say: “Drop dead! I don’t need this job.” The other type is a long-term savings for retirement. Start saving money.
- Act fast if you lose your job. If something happens to your job, go ahead and take a few weeks to recover. But then, hit the ground running so you can get back into things. We see people out of the market for six months to a year, two years, and then it’s hard to get back in the swing of things.
- Don’t guarantee loans for others. So many times, children come to their parents and say: “We want you to guarantee a car loan.” And then there’s an accident. Don’t guarantee loans for anybody.
- Always consider “what if?” That is, what if my income stream goes away? What if my business dries up? What if I become incapacitated? What if I go berserk? Consider the appropriate types of insurance. You may feel kind of foolish setting up all the insurance, and it’s costly. But frankly, it just makes sense.
- Spend some time every day with some success literature. Put something good in your brain for 10 or 20 minutes a day. All day we talk to people and sometimes get negative things. “You can’t do this; you should do that”. Or advisers: “You need to buy this; you need this credit card.” Put in something positive. You’ll see the benefits in the long term.
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10 Ways to Prosper and Avoid Bankruptcy
