The Great Recession was fueled by complex financial “products” and “magical” business models which promised the moon and delivered disaster. Ordinary Americans walked away from their careers to cash-in on the “land rush” and investment goldmines which were suppose to set them up financially for life. But if there is any lesson we should learn from the bankruptcy of companies such as Lehman Brothers it’s that while it is okay to be a trendsetter and explore new ideas and ways of doing things, we should never abandon the fundamentals. And for debtors exiting bankruptcy the fundamentals are going to enable them to enjoy financial success.
Below are a few financial basics which will help debtors survive after their bankruptcy discharge:
Don’t put the cart before the horse. Many post-bankruptcy debtors worry about saving for their kids’ college education or retirement before they even have a savings account set up. The first thing that debtors should focus on after bankruptcy is setting up an emergency savings account that has enough money to cover 3 to 6 months of expenses. In this economy, it would be prudent to have a savings account with enough money to cover 1 year of expenses if necessary.
Avoid complex financial instruments you don’t understand after bankruptcy. As we noted in point number one, create a “fat” savings account first and then consider other simple investments which you understand afterwards. While they may not yield what more risky investments promise, they are more likely to protect your principal and help you avoid a second bankruptcy by providing an extra financial cushion.
Seriously consider if you can really afford to own your own home. Many debtors end up in bankruptcy because they have purchased a home they could not afford. There is nothing wrong with owning your own home; but your housing costs should never be more than one-third of your income and that’s after taxes.