Your bankruptcy discharge gives you have a unique, once-in-a-lifetime opportunity to truly start from scratch and build a financially independent lifestyle.
You have a clean slate. You can learn from the bad habits that led you to filing bankruptcy and build the personal financial habits that will ultimately lead you to financial success.
How many times have you heard someone say, “If I only knew then what I know now, I’d be a millionaire?” You actually have the opportunity to wipe the slate clean and take advantage of all of the personal financial knowledge you now have, or that you now acquire.
Your personal financial success will be determined by the personal financial habits that you create going forward, and those habits will result from the financial plan that you create for yourself. Everything starts with the plan.
Below I’ve set forth the personal financial planning system I personally use for my own family, and which you can use to achieve your own financial independence after bankruptcy.
Create Your Vision
Every plan must begin with a clear and definite description of the desired objective. For you, achieving financial independence is the desired objective.
What will your life look like once you’ve achieved financial independence; when you own your time and do not necessarily have to give away your time to earn the money needed to pay your bills?
What will you do with the extra time you will have? Will you run a new business, pursue a hobby, or perform charity work? You must have a highly-detailed, vividly clear understanding about the day-to-day specifics of how your days will be spent once you achieve your objective of financial independence.
Achievement of this day-to-day ultimate lifestyle must be meaningful enough to you to keep you focused when times get difficult.
The life which you’ll experience once you achieve financial independence must be so desirable to you that you’ll do absolutely everything it takes to attain it.
For example, let’s say you want to spend your life helping animals. If your vision is a vague understanding that you want to help local pets that have been abandoned by their owners, your vision is not defined with the detail necessary to weather the difficult times you’re sure to experience on the journey toward your objective.
Alternatively, if your vision is that you want financial independence so that you can spend a minimum of four hours every weekday volunteering at the local animal shelter, found and sponsor a monthly pet adoption event in your community, and personally foster a minimum of three pets at all times, then you’re more likely to make the sacrifices necessary to achieve the financial independence necessary to allow you to help animals in this way.
When times get tough, you’ll focus on the specific vision you’ve created for yourself and stay the course.
Determine the Financial Requirements for Vision
How much monthly income will you need to live the life you’ve created through your vision? How much personal overhead do you and your family anticipate having once your life is as you desire in your vision?
If you anticipate your monthly living expenses will be $4,000 per month at that time, then you know you must generate that amount of net monthly cash flow from the income-producing assets you create and/or purchase as part of your personal financial plan.
Once your assets provide $4,000 in monthly net cash flow, then you know you can capably afford the ultimate lifestyle you envisioned for yourself.
Emergency Fund Creation
Your emergency fund is the foundation upon which your personal financial plan is built. Having your emergency fund will prevent you from becoming dependent on credit card debt for the inevitable financial crises that arise and putting you at risk of another bankruptcy filing in the future.
Ideally, you’d set aside a year’s worth of expenses in a savings account to cover you no matter what financial obstacle is thrown your way.
However, delaying implementing your personal financial plan until you’ve set aside a year’s worth of expenses is not the best idea. Without proceeding with the later stages of your plan, you may never be able to fund that large of an emergency fund.
To start, focus on quickly setting aside an emergency fund of at least $5,000. That is enough money to cover you for almost all financial emergencies that may arise. Once you’ve set funded an emergency fund with $5,000, then you’ll proceed with the subsequent steps in your plan.
Later, once you are well down your path to financial independence you can begin working toward setting aside a year’s worth of expenses in your emergency fund.
You cannot go where you want to go without first knowing where you are currently. You need a thorough understanding of how much income you’re receiving, how much you’re spending, what assets you own and what debts you owe.
I rely on a couple of important apps to help me understand this information. Personal Capital is free financial tracking tool which allows users to link their existing bank accounts and track spending, net worth, portfolio performance, and retirement savings.
You can categorize your transactions to track your different budget spending categories on a daily basis. This allows you to really learn where your money is going each month.
Second, I monitor my credit scores through Credit Karma. Credit Karma is a free app which tracks your Equifax and Transunion credit reports and provides credit scores based on information from contained within these credit reports.
Every seven days, Credit Karma provides updated credit scores which reflect any changes which may occur within your Equifax or Transunion credit reports. I track all of this from an app on my phone.
Massive Expense Reduction
Once you have an accurate understanding of your current financial situation, next you will focus on massive expense reduction. This is not about skipping Starbucks in the morning or using a couple of coupons at the grocery store. This is about taking big, serious steps to overhaul the way in which you spend your money.
Now that you have a clear vision of what you want your life to become, you need to analyze every dollar you’re spending and ask the question, “Does this get me closer to, or further from, the vision for my life that I’ve created?”
Every single dollar you proposed to spend must be measured against this standard. Every single one.
If you are paying $2,000 to rent your home, then you need to ask yourself whether living in a less expensive home would get you closer to your vision? If so, then you need to move. Immediately.
Does your new car with the new car payments get you closer to, or further from, your vision?
Does dinner at the fancy restaurant get you closer to, or further from, your vision?
Does the Disney cruise you’re considering for vacation get you closer to, or further from, your vision?
If that seems like a sacrifice, then good. Without sacrifice you’ll not get where you’re trying to go. Sacrifice is necessary for achieving anything in life; especially so when you’re trying to accomplish a lifestyle that requires financial independence. It will be worth it.
Increase Excess Cash
Once you’ve went through each and every item in your budget and cut everything that does not get you closer to your vision, then you hopefully will have a certain amount of monthly income that is in excess of the amount of money you need for your monthly expenses.
This excess cash is the fuel to power your progression toward financial independence. The more excess cash you create the quicker you’ll become financially independent and enjoy the lifestyle you’ve envisioned.
There are only two possible ways to increase this excess cash number; cut expenses or generate more income. By this point you will have already cut every expense that can be cut, so you need to find a way to create additional income.
Start by selling any items that you own that you do not need. If you comb through your house I am positive that you’ll find many items that can be sold for hundreds, if not thousands, of dollars. Use craigslist, ebay, or garage sales, to turn these items in to cash.
Once you’ve sold these items, you need to create a source of ongoing extra income. You can get a part-time job to work on the weekends when you’re not working your regular job.
Alternatively, you can start a side hustle business doing something you enjoy to generate additional income. Anyone has the ability to start a side hustle business because the internet levels the playing field.
There are endless opportunities to setup some small online business, as evidenced by Nick Loper’s blog Side Hustle Nation. Check it out and choose a side hustle of your own to launch.
It is difficult, if not impossible, to achieve financial independence if you’re carrying debt. Assume that you have a mortgage payment of $1,500 per month, and total monthly overhead of $4,000.
If your mortgage was paid off, then your total monthly overhead would be just $2,500. It is much easier to create, or invest in, assets that provide $2,500 per month in net income rather than $4,000 per month.
Furthermore, debt repayment is inflexible. If you miss a monthly deadline for payment, you are in default. The tight deadlines that accompany debt repayment require a consistent and regular income.
Income from cash-flowing assets rarely comes in the same precise amounts and at the same precise times. You need flexibility in your budget, and debt payments provide no flexibility.
This is why your focus should be on using all of the excess cash you have to payoff all of the debt for which you are obligated. Pay it all off, including the mortgage.
Create as much excess cash as possible and payoff the debt as quickly as possible.
Invest in Cash-Flowing Assets
Is the home you live in now an investment? If you said yes, then listen up.
An asset, for our purposes, is something that provides you with a regular income without any time commitment from you. A dividend you receive from a stock you own is an example of a cash-flowing asset. A business system you own which provides you with a passive residual income is an asset.
It does not matter if you hold millions of dollars of “assets” on paper. If those assets are not providing you with a monthly cash-flow, then you still must go spend your time to earn money to pay your bills. If it does not regularly pay you, then it is not an asset. So no, your home that you’re living in is not an asset.
Financial independence comes from having enough income from your assets to meet your fixed monthly expenses. Once your assets are paying you what you need to live each month, then you can spend your days doing exactly what you desire.
You can then volunteer at the animal shelter every weekday, as in our prior example, or doing whatever daily activity you envisioned for yourself.
There are only two ways to acquire the cash-flowing assets you need to become financially independence. You either create them or you buy them.
You must either spend your time or your money to build the assets you need to give you the lifestyle described by your vision.
Some examples of cash-flowing assets:
- Rental properties which yield a positive monthly cashflow
- Royalties from books, photos, music, software licenses, etc…you own
- Dividends from stocks
- Interest earned from loans you make
- Websites which provide you an income
- Business that you own but others run
- Rental equipment which yield a positive monthly cashflow…
Vision Achievement – Living Your Best Life
Once you’ve done the work to plan your life, and then implement and achieve that plan, you’ve accomplished something so few ever do.
You’ve designed your life intentionally. You did not let others design your life for you, not your friends, neighbors, boss, or professional colleagues.
Living your life intentionally is the most important achievement you can strive for, yet so few ever do. Many people spend more time planning how they’ll use their vacation days than they do planning what they want their life to become.
Don’t let that be you. Use this clean slate you’ve been provided to design your life intentionally.
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