Cause of Bankruptcy

The Number One Cause of Bankruptcy: Lack of Financial Knowledge

Number One Cause of Bankruptcy: Lack of Financial Knowledge

You can always trace back an immediate cause for bankruptcy. Ultimately, the number one cause of bankruptcy is lack of financial knowledge. Without adequate financial understanding, you can easily set up your life in a way that leads to bankruptcy. There are, however, three basic financial concepts that if applied will usually prevent any future need for bankruptcy relief.

Live Way Under Your Means

Most people file bankruptcy because they are living paycheck to paycheck. The root of this cycle, however, is that most people live right at or above their means. The solution is simple: learn how to live way below your means. If your living expenses only consume 50% of your income, then your financial life will always be easier. You will also have money to save and invest.

Learn how to live well without paying the accompanying costs that most people accept as part of the package.  Many financially-savvy people are living practically for free due the living situation they have developed over the years. Still, others decide to spend every bit of their business or job income on their house mortgage, cars, and other frills of life.  The truth is in the numbers.  The truth can be found through gaining financial knowledge and then boldly applying it. Sometimes this even requires doing the opposite of everyone else with your income.

Save and Invest Left-Over Money

It almost goes without saying that the next step is to save and invest all leftover money each month.  Investments can increase your income.  Savings can also prevent financial disasters when something unpredictable happens.  As you save and invest, a cycle develops where life gets easier and easier.

Make Sure All Gaps are Covered

It is also important to cover all the gaps in life. This includes important things such as insurance, following legal requirements, and having a balanced and thoroughly-thought-out life.  Remember, all financial “gaps” should be covered in your life at all times.  A small hole in the armor of your financial life can allow a dart to pass through that can wreak havoc and lead to bankruptcy. You cannot plan for every possibility in life. It is vitally important, however, to close all obvious gaps that could lead to serious financial problems.

Conclusion: Application is the Key

Apply these three financial concepts to your life.  Your increased financial savvy will not only prevent bankruptcy but also make your financial life much easier.  Remember, you can actually end up acquiring large amounts of financial knowledge with very little real-life benefit.   Only bold and disciplined action will your life actually change for the better.