Budgeting After Bankruptcy (Part Two)

by Russell A. DeMott, Charleston Bankruptcy Lawyer

In “Budgeting After Bankruptcy (Part One),” I explained that the purpose of budgeting: to create wealth.  It boils down to spending less than you make.  The difference increases your net worth.

But how do I do this?

First, don’t sweat the small stuff.  Most financial articles about budgeting stress tracking all of your expenses. How much do you spend on utilities, food, clothing, entertainment, etc?  Tracking every penny is a great idea, but the problem is that almost no one does it, or will do it. People have jobs–sometimes more than one–kids, parents, and other responsibilities.  Most folks just aren’t going to do this.  Call me a budgeting heretic, but I’m going to embrace reality here. You don’t need to do it–at least not obsessively.

Second, DO sweat the big stuff. You just got your bankruptcy discharge. Let’s talk about big expenses: house and cars.  Maybe you’re current on that $2400 a month mortgage on the house you have little to no equity in.  Maybe you’re also current on those two auto loans as well.  But do you need these things?

Sure you need a house, but why not consider renting one for $1500 a month?  Why not let one car go?  (Remember, you discharged the debt in bankruptcy if you did not reaffirm the debt.)  You can rent for three years and save over $32,000 in mortgage payments plus maintenance costs, which can be very significant.  After the three years is up, buy a home with a payment of $1500 or so per month. This strategy is especially wise if your home is “upside down” and you have no equity in it.  I regularly see folks who owe $300,000 on a home worth only $225,000.  If you’re in this situation, why keep the home?

The same goes for cars. Why have a $450 per month car payment on a car in which you have no equity?  That might be a reasonable payment for your family car, but two $450 payments? (Or worse yet, one payment of $450 and one for $600!)  You get the picture. These are large, significant expenditures you are making each month and they do not create wealth.  This is the “big stuff” you need to sweat.

$455,646!

Huh? Welcome to the power of compounding! You’d have $455,646 if you took $12,000 per year ($1,000 per month) and put it in a 401(k) or IRA for 20 years–let’s say from the time you’re 45 to the time you’re 65, normal retirement age.  This assumes NO increase in contributions–just the $1,000 per month we saved on your house and car payments and assumes only a 6% return.  The fact of the matter is that your house is a huge expense.  Same for your cars.  Yes, you need housing and transportation, but don’t let these rob you of your ability to save.  Know the difference between needs and wants!

So think big!

The bottom line here is that you should start the budgeting process by targeting large expenditures before you worry about the small ones.  In “Budgeting After Bankruptcy (Part Three)” we’ll discuss how to implement this strategy.