Budgeting money is one of the toughest parts of everyday life. We are hard-wired to want things that will comfort us, make life easier, gain favor with others, and that give us pleasure. It’s hard to fight the urge to purchase things when we are bombarded by advertisements for consumer goods that can be ordered with a click of your phone.
This struggle is particularly hard if you’ve just been discharged from bankruptcy. You can’t go back to the spending habits that put you in bankruptcy. If you plan to get a mortgage, buy a car, or qualify for an apartment lease in the next few years, reforming your spending and living within your budget is crucial.
Four Steps to Understanding Your Finances
The bottom line when creating a budget is that you can’t spend more than you can afford. The process of understanding your finances has four simple steps:
- Gather your bank statements, check stubs, and other financial information. Examine several months of these documents to determine your average monthly income.
- Understand where your money goes: make a list of your bills and other spending, from necessities like rent, health insurance, taxes, and utilities, auto expenses, groceries, to subscriptions and entertainment. Look for ways to create savings by cutting back on expensive habits or hobbies.
- Establish an emergency fund for unforeseen expenses like a period of unemployment, a medical issue, or finding a new place to live. Be strict about using this account for true emergencies and not as a slush fund. Experts say you should maintain at least four months of income in your emergency fund.
- Use the 50/30/20 method (or something similar) to divide your income into necessary expenses (50 percent), wants (30 percent) and savings or debt reduction payments (20 percent). Use a cell phone app, spreadsheet, or bank account that categorizes your spending so you can easily see if you’re staying within your budget.
Budgeting Resources That Are Free and Easy to Use
Creating a budget and sticking to it isn’t the same process for everyone, but we can all take advantage of resources that can help. Consider these options:
- Track your spending with a phone app. Some help you save money by rounding up your spending while others show you in real time what your balances are and if you’re overspending on a particular category like concert tickets.
- Take a financial literacy class. Colleges like Harvard and MIT offer free online classes that help you understand and plan your finances. Duke University has a free, five-hour behavioral finance class that helps you understand why you overspend.
- Look around for a bank with higher interest rates, or that offers a bonus for opening a new account, but be careful of monthly fees that kick in if your balance drops below a certain amount.
- Plan ahead for larger purchases. Save money and aim to pay for most of the purchase in cash rather than a credit card (and incurring high interest rates on the balance).
Set Financial Goals and Meet Them
Long-term financial health requires discipline. You may achieve your goals more easily if you break them down into short-term, medium-term, and long-term, each with a small reward for achieving the benchmark. In the short-term, your goal may be putting aside 20 percent of your income for savings. Your medium-term goal may include buying a new car in two or three years, and your long-term goal can be qualifying for a home mortgage.
Rebuilding your credit to qualify for loans in the future can be as simple as making all payments promptly, getting a secured credit card from your bank, and saving a significant portion of your income, which make you attractive to lenders. Some may even loan you money while the bankruptcy label remains on your credit scores.
Your friends at Lam Law Firm hope to see you successfully recover and control your finances after your bankruptcy. When one person thrives, we all benefit.
