One of the best times to develop a comprehensive financial plan for managing your finances in the future is immediately after your bankruptcy is discharged. The biggest mistake you can make after a bankruptcy is using the same financial strategy that led you to file bankruptcy in the first place.
A financial plan requires you to develop and stick to a budget that ensures you spend less than you earn – and a budget that provides for emergency funds necessary to deal with unforeseen future expenses. Although there are circumstances beyond your control that may lead to another bankruptcy, a solid budget and a realistic emergency fund drastically reduce your chances of having debt problems again.
Track your expenses
Your first step in developing your financial plan is to find out where all your money goes each month. Tracking all of your expenses for two months helps to provide a good estimate of your spending habits. You may be surprised at what you find, and may be able to pinpoint unnecessary monthly expenses you can easily eliminate.
Create a budget
After you’ve tracked your expenses for two months, create a budget by deducting your monthly expenses from your monthly income. It’s important that your expenses are realistic and that you allow some room for unexpected expenses. If your budget does not indicate disposable income sufficient to meet your financial needs, you need to determine how to either lower some of your expenses or find additional sources of income.
The biggest mistake you can make after a bankruptcy is using the same financial strategy that led you to file bankruptcy in the first place.Control spending
Sticking to your budget is critical to your financial well being. Consistently spending more than your budget allows is a recipe for debt. “Online banking” offered by most banks makes it easy to set up automatic payments for all of your major fixed monthly expenses (rent, auto payment, insurance, etc.) so you can pay your other monthly bills as soon as you get paid. This way, you know exactly how much money you have for other expenses, and can adjust your budget accordingly.
Create an emergency fund
You need an emergency fund. No matter how well you budget and control spending, there are circumstances for which you can never plan, and they can be devastating to your credit if you don’t have readily-available cash. Your budget should incorporate a certain amount of income to be used for establishing an emergency fund in an interest-bearing savings account. It’s a good idea to set up automatic transfers into your emergency fund each pay period. You should ideally try to save at least three months of living expenses in your emergency fund.
Fund Your Retirement
Once your emergency fund is established, start contributing towards a retirement plan or an IRA. A small percentage of your check can rapidly grow with the tax benefits and compound interest rates offered through retirement plans, especially if your employer matches a portion of your contribution.