Buy Like Buffett: Tips to Avoid Filing Bankruptcy

Happy New Year! A new year is upon us and you can start it off right by making sure that your finances are in tip-top shape. According to CNN Money, "[T]he number of Americans filing for bankruptcy in 2010 ticked up 9% over the previous year to more than 1.53 million, industry groups said Monday."

Individuals are being forced into bankruptcy at an alarming rate because of financial hardships. Bankruptcies are occurring as a result of extremely high debt burdens and a lack of rising wage growth.

You can avoid this financial pitfall by following a few simple rules.

Build your income outside of your 9 to 5 job.

Relying on your full time job for permanent income is a dangerous proposition today. With the uncertainty concerning many employers, employees would be best served to build a part-time income outside of their primary employment. You can diversify the risk by developing additional ways of generating income.

Start a home based business or an Internet business. Earn extra income by doing something that you are passionate about and enjoy doing. This extra money could come in useful for paying down bills or loading up your retirement plan.

Decrease your spending level.

You can quickly calculate how much of your income is applied towards expenses. Most people spend more than 100% of their income which is why they rely on debt for survival. You can keep yourself from drowning in debt by setting a maximum threshold for your expenses.

If you keep your expenses below 75% of your income then this will leave a 25% cushion for you. This 75% ratio should include mortgage payments, car notes, insurance bills, food, entertainment expenses, and miscellaneous expenses. Keep your bill payments each month to a much lower percentage than your income and you can avoid relying on your credit cards to get you through the month.

Seek help.

The first two measures are preventive in nature and are aimed at keeping you out of bankruptcy. This last measure is for those that are on the brink of a Chapter 7 or 11 filing. It's still not too late to avoid bankruptcy with proper planning. Seek out professional help to help you structure a plan that can keep you from financial ruin.

Avoid fly-by-night agencies that will charge you huge fees and whose only goal is to rip you off. You can get free help from a government approved agency. Organizations like the FTC offer a ton of free information that can put you on the right track to putting your finances in order.

I hope that you find these resources useful and that they will help to guide you into a prosperous 2011!

Mark Riddix is the founder and president of New Horizons Financial Management, an independent investment advisory firm that provides personalized investing and asset management consulting. Mark is a regular contributor to Seeking Alpha and has written financial columns for Baltimore and Washington, D.C. area newspapers. Mark publishes his own financial blog, BuylikeBuffett.com and has written the book Your Financial Playbook.