Ramit Sethi: 3 ‘Drastic Moves’ To Make When Nearing Bankruptcy
Bankruptcies are on the rise. According to United States Courts, total bankruptcy filings rose nearly 17% last year, with significant increases in both business and non-business bankruptcies in the 12-month period ending Dec. 31, 2023. Personal bankruptcy filings rose 16% to 434,064, compared with 374,240 in December 2022.
To avoid a similar fate, you should keep close tabs on your financial health. Factors such as having too much debt and not enough savings, or paying too much rent and pretending things are stable can place you and your finances in a pickle.
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To illustrate, here’s a cautionary tale of a married couple, Alex and Courtney, who were two months away from bankruptcy when they were featured on financial guru Ramit Sethi’s “I Will Teach You To Be Rich” podcast. Find out his advice for them — plus, learn some actionable steps to take if you’re in a similar situation.
Why Alex and Courtney Are at Risk for Bankruptcy
Alex and Courtney told Sethi that they have $45,000 in assets, the bulk of which is five motorcycles they own, and $130,000 in total debt. Of that debt, $107,000 is in student loans. The couple makes $9,000 per month in gross income, but their rent is $4,100, which is close to half of their income. They also have $15,000 in savings, which would cover their living expenses for only about two months.
Sethi’s Advice for the Couple
“It’s your money,” Sethi told the couple. ‘It’s up to you what your risk tolerance is. But you’ve got $15,000 in savings. That is basically two months of expenses. That is as red flag as it gets for me. If I was down to two months of expenses, I would be making drastic moves.”
Here are three moves Sethi said the couple should make due to nearing bankruptcy.
Don’t Let Your Possessions Own You
Buying luxury items can be rewarding and give you a sense of accomplishment but also can result in you living beyond your means.
“Have you heard this phrase: The things you own end up owning you?” Sethi asked the couple. “That’s what’s happening here. Five motorcycles means you need a big garage. If you live in an expensive neighborhood, that means expensive groceries and repair people. An expensive house means extremely high phantom costs for repairs and maintenance.
“Now, listen, it’s fine to buy really nice things, but you have to factor in all the costs, the time and the money, and the mental overhead. Because if you don’t, these inanimate things will start to own you.”
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Move To a Much Cheaper Place
Your rent or mortgage shouldn’t exceed a certain percentage of your income. If it does, it’s too much.
Sethi acknowledged that the couple had a list of criteria for their new home, such as a garage for the motorcycles and a washer and dryer. However, their desires landed them in a rental that cost them $4,100 per month — $2,000 more per month than their previous rental.
Like many advisors, Sethi said a good guideline is to keep housing costs below 28% of your gross income. If you live in a very high cost-of-living area, you could stretch it a little bit. However, he pointed out that the couple’s housing costs equaled a whopping 45% of their gross income.
Be Realistic About Your Situation
Another one of Sethi’s drastic moves for the couple, specifically Courtney, was to take a hard look at the situation and acknowledge the state of their finances.
“You’re losing money every month,” Sethi said. “It’s not that funny. I think there’s a time and a place for jokes and there’s a time to face reality. And even in these dire circumstances, perhaps especially in them, Courtney continues to evade and joke and distract from really taking an honest assessment of what is going on. This is not a good sign.”
A Financial Planner’s Advice
Jay Zigmont, Ph.D., CFP, founder of Childfree Wealth, had this practical advice that you can easily apply to your situation if you’re struggling with the same sort of financial woes that Alex and Courtney revealed.
Keep Housing Costs Under One-Third of Your Take-Home Salary
“A $4,100 rent on $9,000 take-home is unsustainable,” Zigmont said. “In general, your goal should be to keep your housing under one-third of your take-home salary. It may be time to look for a cheaper place to stay.”
Consider Applying for the SAVE Program for Student Loan Debt
For large amounts of student loan debt, like the couple has, Zigmont said it may help to apply for the SAVE program and consider filing taxes as married filing separately.
“With the SAVE program,” he said, “it will lower their monthly bill and also will stop interest from accruing if it is not covered.”
Prioritize Paying Off High-Interest Debts
Zigmont also said the couple should sell the motorcycles to pay off the other $30,000 they have in debt. It’s a move that could save tons in interest. “Look at it this way: If it is credit card debt, it is costing $6,000 or more a year just to have that debt.”
Follow a Budget and Avoid Acquiring Additional Debt
“Getting out of debt is hard,” Zigmont said. “The first step is to get on a budget and stop taking out more debt. The combo of high rent, student loans and debt is going to crush this couple even though they make a six-figure salary.”
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This article originally appeared on GOBankingRates.com: Ramit Sethi: 3 ‘Drastic Moves’ To Make When Nearing Bankruptcy
