I was listening to a podcast on my morning walk the other day when the speaker referred to an Ernest Hemingway quote about bankruptcy. Here it is:
"How did you go bankrupt?" "Two ways, gradually and then suddenly."
I was struck by the simplicity and truth in this statement. Here's my spin on it:
1. People start to go bankrupt slowly when they spend more than they earn. At first, they can keep up with the extra payments, increasing debt, juggling finances, etc., but eventually, the small spending starts to add up and puts increasing pressure on them. This is how they start to go bankrupt -- at a very gradual (maybe even unnoticeable) pace.
2. Then something "big” happens -- a layoff, a baby (forcing one parent to stay home), an accident, a bad loan (think housing), and so on. Suddenly, the family that was going bankrupt gradually is upside down in a BIG way. There's nothing that can be done (in their minds), so they go bankrupt.
To an outside observer, it might seem that these people went bankrupt very quickly due to a bad/expensive event in their lives. But the truth is that they had been going bankrupt for a long time. Their finances were getting progressively worse over time and they just needed a big push at the end to send them over the edge. Their actual bankruptcy may have started years and years prior to the actual event when they started the cycle of poor money management and excessive spending.
This is why I continually remind people that spending less than they earn is a must for financial success.