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Clearly bankruptcy is not a destination on anybody’s financial map, but it’s where you could end up when you encounter roadblocks and your life is detoured by the unexpected. So, everyone who arrives at bankruptcy takes a different path, but the road back to financial health and prosperity has but one starting point and with it the opportunity to map out a new financial future.
Life after bankruptcy begins with a financial plan. While it is an unfortunate place to find yourself, post-bankruptcy may very well be the best opportunity you could have to set a course with achievable goals and a clearly defined strategy. Whether you embark upon the journey on your own or with the guidance of a financial professional, the key is to follow a process and track your progress against established benchmarks along the way.
The Post-Bankruptcy Financial Planning Process
Establish achievable goals: While a bankruptcy may put a crimp in your dreams, it should in no way discourage you from achieving your most essential goals. If anything, it provides an opportunity to crystallize your goals and set real priorities. After a financial setback, it is more important than ever to clearly define and prioritize that which is most important to achieve with realistic timelines and accurate costs. Whether your goal is to pay off remaining debt or save for retirement, it should be quantified with target dates and frequent benchmarks for checking your progress.
Establish a formal budgeting and cash flow management system: For many bankruptcy debtors, it was the lack of budgeting and cash flow management that got them into trouble. With debts cleared (Chapter 7) or rearranged (Chapter 13), it may be your single best opportunity to establish a budget and cash flow management system that can keep you in control of your finances. Your system should be formalized on a spreadsheet or with a budgeting software program.
All expenditures, fixed and variable, essential and non-essential, should be plotted on a monthly ledger with companion columns to record actual results. It is important to set monthly cash flow targets and manage your budget to those targets. Monthly surpluses can be applied to debt repayment or savings, and monthly deficits force immediate adjustments to expenditures in order to make up the shortfall. Just like a business.
Rebuild your credit: With a sound budget and cash flow management system, you should never really need to use credit again, except for emergencies. Still, you may have plans to buy a house, or a car, and a solid credit standing is important for employment prospects and other financial needs. Start with one credit card. And, if you can’t qualify for one, get a secured credit card. Add a gas card and a retail store card, and charge for expenditures already in your budget. But, and, it’s an important but, pay your entire balances each month. Within a year, your score will improve dramatically.
Develop a savings and investment strategy: Following bankruptcy and with a cash flow management system in place, your savings should increase each month. Once you have accumulated at least six months worth of living expenses in a savings account, you should begin to allocate portions of your savings towards other goals. If your employer offers a 401k, you should be finding ways to maximize your contribution, especially to take advantage of your employer’s matching contribution if it is offered.
Everyone’s investment strategy is different depending on their risk tolerance; however, very few people can afford not to be invested in growth oriented investments. Many of the top mutual fund companies offer free investment planning tools that enable you to develop your own investment allocation based on your goals and your financial profile.
Should You Use a Financial Planner?
Depending on the complexity of your situation, you may be able to find everything you need through online resources. Working with an independent advisor (stay away from stockbrokers or insurance agents who primarily make money selling products), can be extremely beneficial, but, unless you have a fairly sizable investment portfolio, or can afford an hourly fee for advice, you may be just as well off putting the pieces of your puzzle together on your own. Sites such as Mint.com are excellent personal finance resources with tools for budgeting, cash flow management, goal setting and investment planning. They also have an extensive library of personal finance articles.
If you want assistance in budgeting and debt repayment, you may want to consider working with a non-profit credit counselor. Many offer post-bankruptcy education, and personal planning, as well as debt consolidation. They may be useful for bankruptcy debtors who still have debts and might like to simplify their financial life by making one payment to the credit counselor.
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