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wallet in a vicegripBankruptcy happens when our accumulated debt passes our ability to pay the maintenance on our debt. It’s frustrating, it’s humiliating, and it can negatively impact our finances for years to come. According to Eric Severeno, a bankruptcy can even impact your ability to buy a house. In order to avoid a bankruptcy, we have to avoid debt, reduce debt, and change the behaviors that created debt in the first place. If we can learn how to manage our behaviors, this is a totally doable process.


Here are 5 ways to manage behavior, manage cash, and get our financial acts together:

Save for Emergencies

One of the largest drivers of debt is that we have somehow started to think about debt as a bulwark against Murphy’s law. You don’t overuse credit cards, right? That little slip of plastic in your wallet is there why? Just for emergencies. The problem with this thinking is that the debt is necessarily cumulative in nature, and this can eventually lead to bad credit ratings and even bankruptcy. Besides that, if you aren’t being intentional enough to put a few grand away in savings, you are likely to have very ill-defined criteria for what constitutes an “emergency.” After all, cars need oil changes every 3,000 miles, school starts in September and Christmas is always in December.

Cut up the credit cards, set aside $1,000 as a baby emergency fund, and increase that to 3-6 months of household expenses (between $10,000-$30,000 for most Americans) after you finish paying off debt. Remember, predictable expenses are not emergencies! Don’t touch this money unless absolutely necessary to keep a roof over your head, food in your belly, heat in your furnace and a working engine in your car. This way, credit cards will cease to be your primary defense against Murphy.

Carry Adequate Insurance

Another way to create a bulwark against unforeseen financial disaster is to protect your assets with adequate insurance. This should include homeowners or renters insurance, life insurance, health and dental insurance, auto insurance, and possibly a general liability policy.

Avoid Accumulating Debt

100% of bankruptcies happen to people who borrowed money. You would think this would be common sense, but you’d be amazed at how many Americans think that you can continue accumulating debt and not endanger your financial future. Let’s look at a few of the myths that debt-marketers have successfully planted in the American psyche:


Myth: You need to build up your credit score.

Truth: Your credit score is a bad measure of your financial health, as it essentially measures how much debt you’ve taken out and paid back on time. Now, sure, there are some institutions that will make decisions based on this score. Those institutions are what experts in the industry call “stupid,” as they are making no effort to look into real indicators of your ability to pay – like whether you’ve got any money.


Myth: Credit cards are okay if you pay the balance off every month.

Truth: Statistically speaking, no one does this. That’s why Visa has a campus of several massive, beautiful buildings in one of the most expensive real estate markets on the planet, and you have 3,000 square feet in the suburbs. But even if you are one of the six nerds that actually pull this scheme off, you’re still not coming out ahead, because research shows you spend 18 percent more when using credit cards, compared to cash. Some studies indicate it’s actually much higher. So, no, you’re not getting the best of the credit card companies, with their millions they spend annually studying your behavior.


Myth: You can’t go to college without student loans.

Truth: Billions of dollars in scholarships and grants go unclaimed every year because students have accepted this myth and given up on other avenues. There is so much free money out there it is ridiculous that anyone should have to borrow it to go to school, as long as that school is reasonably priced and the field of study has some bearing on the marketplace.


Myth: You should borrow money to invest in high-performing investments.

Truth: Anyone who tells you this should be slapped. Would you go mortgage your home to put it into the stock market? Why not? It’s the same logic! This kind of analysis doesn’t take risk into account. It’s this kind of thinking that puts people in a bind and forces them to pull money out of investments at the bottom of the market.


Not to beat a dead horse, but cut up your credit cards. When you close those accounts, it has the same mathematical effect as investing in a mutual fund with a guaranteed growth of 18 percent. I know I’m the only voice in the wilderness saying this, but that doesn’t mean I’m wrong. Do your wallet a favor and stop borrowing money. Forever. Please.

Do A Unique, Zero-Based Budget EVERY MONTH!

This isn’t optional. According to Dave Ramsey, the single biggest mistake people make with money is they don’t bother. They don’t live or spend or save on purpose. Intentionality is likely the single greatest indicators of wealth-building and financial success. And zero-base budgets are the single most effective way to get intentional with your money.

Zero-base budgeting takes each and every month and treats it like new. This means that estimate how much money is coming into the household and allocate literally every dollar of that money towards an expense category. Not only will this ensure that you are not overspending this month’s income, but it helps you save for upcoming expenses, as well. You might have a trip coming up, so your spending will be higher than the last month. Or you might have an anniversary in the near future that you'll spend a little more on dinner for. These types of things cannot apply to each month, and this type of budgeting understands and embraces that.

Use the Envelope Method 

We mentioned before that using cash will save you about 18 percent, but the effect is actually much higher than that! Withdrawing cash every month and allocating it to your budget categories prevents overspending, and you’ll never bounce a check or get dinged with an overdraft fee. It’s old-fashioned, but it is the single best way to handle money.

Pay off Debts

If you haven’t successfully avoided debt thus far, that just makes you normal. A whopping 80 percent of Americans struggle with unwanted debt. But don’t despair; there is light at the end of the tunnel. If you stumble across a bonus at work, don't be afraid to use that extra money towards paying off your debt right away. A treat to yourself sounds great, but if you didn't plan on having that money anyway, why not use it to get a little ahead on your debt?

According to Harvard Business Review, the best method for paying off debt is to list the debts by balance, smallest to largest, pay minimum payments on everything but the little one, and attack the little one with a vengeance! Now if your financial guy is a nerd, he might tell you that the “right” way of doing this is to pay off the loan with the highest interest rate first, but he should put his opinions back behind his pocket protector. Paying off debt isn’t a math problem, it’s a behavior problem. That’s why I’ve written about this with so much fire. You need to get mad at that debt, and something happens inside of you when you polish off that first little debt. The power of small victories is a real motivational force, and you need to make it work for you if you have any hope of success.

When all else fails, a bankruptcy may be the best available option. But most of us aren’t there yet, and we never have to be there if we live these principles. It takes discipline, and it takes hard work, but it is a happy, abundant way to live.


At Alliance we are more than insurance brokers, we're financial planners, consultants, and experts when it comes to saving money where you can. If you would like a personal risk audit or a more in-depth commercial account audit, reach out by filling out the short form below. One of our experts will reach out for a quick no-obligation chat about how we can help.

Posted 10:33 AM

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