The increasing reports from across India and the globe of some highly successful businessmen and celebrities going bankrupt have been flooding the news in recent times. Many of the successful and well-known people who haven’t gone completely bankrupt have lost a sizeable portion of their wealth. While each of these events is unique in their own way, there are always some similarities for such significant financial collapse to occur.
There are many mistakes that can work in a collaborative manner to make such an event to occur, and much of it has to do with behavioral issues. Such an event is not exclusive to successful people as just about anyone can become a victim of such a financial collapse if the safety measures are not put in place at the right time. Here we would discuss the few common mistakes that people make that lead to bankruptcy or major financial loss –
Don’t be Impulsive with Your Money
It is one of the most common reasons why people continue to damage their finances on a regular basis. It leads to irreparable financial damage in due course and finally leads to bankruptcy. Take time in considering pros and cons of any significant investment whether it is buying a house, starting a business, partnership in a business, investments in the equity market, or anything else, especially when it has potential risk attached to it. It also implies for any lavish spending as well that you may not possibly be in a position to afford. Check with your accountant or partner before making any such financial decision to make a logical decision that you won’t regret going forward.
Do Not Over-Leverage
Borrowings beyond what is needed and essential should be avoided at all cost, especially when you have sufficient wealth. It would help you stay within your means and avoid putting the additional financial burden of high interest on your personal wealth of business. Whatever be the reason for borrowings, if it can be avoided, it should be avoided. Keeping the borrowings to the lowest level possible would mean that you are not only saving more, but also safeguarding yourself from financial risk. Wealthy people at times over-leverage financially in their personal and professional life that leads them to get into a debt trap of massive scale they find hard to come out of later on.
Know Your Expenditure Limits
Many people who end up going bankrupt spend more than they can afford. Ideally, the spending for any given year must not exceed 4 to 5 percent of the financial wealth. If it goes beyond that, you enter the over-spending zone and need to retract immediately. To avoid bankruptcy, safeguard your capital. It would only happen when you know how much you can spend and know when to stop.
Limit any Kind of Illiquid Investments
Many rich people have too much of illiquid investments that can be a problem for them. They might have investment properties that are not doing well or an investment in a private company that is running into loss. They are unable to come out of these investments. Thus, it is best to keep illiquid investments to a minimum. Try to invest in liquid assets such as SBI best mutual fund scheme that you can use when you need money.
Plan Portfolio to Lower Risk
You need to have an investment plan that will allow you to lower your risk. You need to build equity investing over time, and it should be an essential part of your investment portfolio. You should have an optimal amount of equity, debt, and property to ensure that you are living comfortably.
Create a Safety Net
It is a good idea to setting some amount of liquid assets into a vehicle such as Trust. You should not touch it unless you absolutely need it when you can use it for your regular expenses. It will help you protect yourself and even your family in case of financial trouble.
Keeping the above tips in mind, you can avoid bankruptcy and ensure that your wealth is secured. In addition, you will be able to spend your retirement years without having to depend on anyone and doing what you love.