How to Avoid 4 Common Mistakes Leading to Bankruptcy

The last few years have witnessed the unfortunate downfall of several successful business persons as they made mistakes leading to bankruptcy. From multi-billion dollar businesses, million dollar yachts, multiple private jets, mega-mansions,  to fleets of luxury cars - whatever you can imagine, they had it all. They were the world's 0.01%.

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So what went wrong that they went bust? Some say bad luck, some say greed, but at the root, some severely poor financial planning leads to devastating losses. As a result, the secret habits of billionaires have come to the surface. 

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So, one thing is for sure – even though you have an unimaginable bank account, a lack of sound financial advice can lead to bankruptcy within a short time. To understand the importance of excellent financial planning and avoid the major pitfalls, knowing more about bankruptcy and what can lead to this situation is important. 

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What is bankruptcy?

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Simply put, bankruptcy is a legal procedure that enables business organizations or individuals to gain freedom from outstanding debts. After filing the petition, the debtor's assets are evaluated and auctioned to repay the debt.

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Besides, it allows the creditors to obtain a part of the repayment via liquidating the debtor's assets. While most bankruptcy stories often put successful personalities into the limelight, it is not limited to them.

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Even ordinary people suffer from the same afflictions. Catastrophic financial planning, behavioral issues, fundamental human nature, and impulsive tendencies shed light on why bankruptcy is a real problem.

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What causes bankruptcy?

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In the last few years, there has been a dramatic rise in bankruptcy filings across the globe. As more and more people find themselves unable to pay off their debts, financial planning has gained more prominence.

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Now, it has become more crucial than ever to attain more knowledge. Take a look at the reasons that might eventually lead to bankruptcy. 

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1. Medical expenditure

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A majority of the bankruptcies filed have roots in medical expenses. Long-term medical issues inevitably lead to less time working.

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This ultimately causes unemployment and the inability to pay bills. Though health insurances and other discounts offer assistance, it is not enough. 

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2. Whimsical purchases

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Another reason that can cause bankruptcy is purchasing things whimsically. Making financial decisions without any logical basis is an excellent catalyst for the loss of money. That is why it is vital to take time and rethink whether it is an essential purchase or an unplanned one.

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Share your struggles and seek expert advice from professionals with extensive knowledge of financial planning. They can help you to plan your portfolio and make the right investments. 

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3. Excessive credit use

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Having control over your spending is crucial for following a budget. However, for some, that is an impossible feat. The result is excessive credit card bills, large outstanding, and other bad investments. 

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It doesn't take much time for things to spiral out of control. Ultimately, making the minimum repayments for the debts becomes impossible. The inability to pay off the loans leads to bankruptcy.

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4. Unexpected expenses

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Impulse shopping can affect your financial health in the long term and short term. Continuous unplanned expenses can lead to bankruptcy. If you shop using your credit card, imagine the hefty bill waiting for you at the end of the billing cycle.

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And if you choose to pay only the minimum amount, you risk paying more due to the high-interest rate. Also, don't forget the post-impulsive purchase guilt and stress.

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Top 4 poor financial planning decisions that can lead to a downfall in the finances

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The lack of financial planning or poor planning leads to decisions that often cause a downward financial slope. Here are some of the reasons and potential solutions to overcome them. 

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1. More earning, more spending

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Cause

Humans have the inherent tendency to live for the present. While this instinct sounds good in inspirational quotes, it is more of a hurdle when planning finances. If you spend whatever you earn in the present, you will have nothing saved for the future. 

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Not having enough money is not the problem. The real issue is the lack of conscious willpower to save it for the future. That is precisely why the money habits of the wealthy are not to be taken too seriously. They might end up worse than they have even begun initially. 

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Solution

The ideal solution is to set aside a portion of your earnings before you spend. Even if it is only 1% of your total income, it is something for the future. You should set aside at least 20% of your monthly take-home salary as savings and investments. This way, you'd not be entirely dependent on paycheck-to-paycheck.

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2. Developing Fear of Missing Out (FOMO)

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Cause

FOMO is a real problem when it comes to poor financial decisions. It can lead to choices and decisions that are based on fear instead of logic. Can you imagine seeing an ad "5 Items left" and not feeling the need to purchase it right away?

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The primary issue related to fear-based decisions is the lack of sound knowledge. Most companies use the FOMO marketing trap to get more customers and increase sales. Knowing that if you don't buy the product now you will be left behind leads to impulsive shopping.

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Solution

The best solution to this problem is to create a list of crucial financial priorities. Whenever you are hit with FOMO, look at the list. Make sure that priorities represent absolute needs and not frivolous wants.

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3. Caring too much about others opinions

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Cause

Herein lies the problem. We often benchmark our living standards based on what others, such as neighbors, family members, or friends, do. It is a recipe for financial disaster.

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For instance, you see your best friend have a nice car and automatically begin wanting to purchase one. While the wish is not absurd, practicality is crucial. 

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Firstly, you may not have detailed knowledge of your friend's finances. Perhaps, your friend has purchased the car on loan, or maybe the purchase has caused some financial struggles. 

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Secondly, you need to take a look at your financial wealth. If you continue to make your financial decisions by comparing them with others, you will inevitably face a severe monetary crisis.

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Solution

Here budgeting comes in handy. Divide your total expense into survival needs, critical needs, investments, and wants. Now, you need to add the potential amount of funds necessary to each section. After that, calculate the total spending amount. Then compare the total spending amount to the income. 

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If the spending amount exceeds, you need to cut down the expenses. Perhaps, eliminate costs that are not your absolute necessity. That way, you can change the spending plan and proceed accordingly.

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4. Blindly trusting experts

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Cause

Having extensive financial knowledge is not always possible. The primary reason is that only a handful of people genuinely try to learn about credit scores or the stock market.

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While you expect professionals to offer reliable guidance, they might have nefarious intentions. In that case, seeking help from an expert is a good idea. However, the issue lies in the choice of the expert.

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Placing too much trust in the expert is not a great idea. You can even fall into the traps of a scammer, leading to complete bankruptcy. Financial loss is inevitable if you give someone incompetent the authority to make your financial decisions. 

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Solution

The only practical suggestion is to know more about the expert and the topic of discussion. For instance, if you want to meet a professional to consult about stock market investments, learn about that industry. You need to know the basics.

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After that, compile a list of questions to ask the expert. If they have the credentials, they can readily answer your questions. Also, check out the background, skills, and expertise of the professional you want to consult. While taking the advice of an expert is good, doing so blindly is a bad idea. 

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Final Thoughts

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Poor financial management can quickly lead to bankruptcy. It affects wealthy celebrities and moderately-rich and ordinary people alike. That is why tight control over finances and allowing experts to offer suggestions are vital.

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You can secure your future by adopting preventive measures and refraining from falling into financial traps. Remember that a financially sound future will help you have a relaxed retired life.