Staying afloat

The subject of "bankruptcy" is back in the news. Individuals, families, and companies are embracing again the protections that going bankrupt provide-namely, the ability to walk away from one's financial obligations. What causes a person or an organization to go bankrupt? What should Christians think about such a notion? Are there things we can do in our own financial planning to help avoid such a drastic measure from taking place in our own lives?

It is probably too simplistic to say that one goes bankrupt when his obligations become greater than his ability to pay them. But simply put, when a person has more debt than assets, and less cash flow than his debts require, the bankruptcy option appears to be the only way out. No matter how simplistic it may seem, the easiest way to avoid bankruptcy is to avoid consumer debt. When an individual runs up massive credit card balances, the "minimum payment" each month can become a daunting amount to have to cover.

Generally speaking, at least with a house payment, there is always an asset (the house itself) that collateralizes the debt. But in the case of credit cards, the items purchased are almost always "consumed." Vacations and nice dinners are a good idea, but the prudent thing to do is only to enjoy such amenities after saving up for them. Charging such things to a credit card and hoping to be able to pay it off down the line is fiscally irresponsible to the core.

But beside avoiding consumer debt, one of the key things individuals can do to avoid bankruptcy is to maintain adequate cash reserves. Retirement planning is important, and the kids' college accounts are important, but too many people do not have sufficient liquid reserves in the case of an unexpected problem. Cash reserves can go a long way toward avoiding bankruptcy when a person loses his job, or cannot sell his home, or gets stuck with unexpected medical bills, etc.

A good rule of thumb is that an individual ought to have six months' worth of living expenses in a liquid savings account. For some people, perhaps a year's worth or more is a good idea (particularly people who work in a high turnover, cyclically exposed industry).

Step three is to have adequate insurance. Health insurance, auto insurance, and liability insurance are not just good ideas-they are requirements for the fiscally prudent believer. Half of all bankruptcies are caused by not having adequate insurance protection in the face of a personal disaster. Premiums are not cheap, but a $500,000 hospital bill is not cheap either. Your monthly budget has to include space for premiums on the appropriate insurance policies.

Finally, living within one's means is the most obvious and needed step in avoiding bankruptcy. If you make $50,000, do not live a $51,000 lifestyle. If you make $200,000, do not live a $250,000 lifestyle. The 80/10/10 rule is a good one-give 10 percent, save 10 percent, and live off of the remaining 80 percent. No one ever went bankrupt by spending less money than he makes. Sometimes for a Christian, the best thing is also the most obvious.