Dear Rick:
Ever since the financial crisis my financial affairs have been a wreck. For a few years I was working with one of the debt consolidation companies, and I was going nowhere fast. After reading one of your articles last summer, I decided to file for bankruptcy. It was the best decision I have ever made. I am now out of bankruptcy and no longer in debt. Following your advice, I have got a handle on my expenses and I did a cash flow statement and now being debt free, I can save about $1,000 a month. My question is now what? You should know I’m in my late 40s, in one of the lower tax brackets, and my goal is to begin saving money so eventually I can retire. The company I work for is a very small company, and does not have a retirement plan.

Thanks for your great advice.

Devin

Dear Devin:
I have always been a believer that bankruptcy is a tool that in the right situation, should be taken advantage of. One of the great things about our country is that we do believe in second chances, and that is exactly what bankruptcy does, it gives someone the opportunity for a fresh start. The key to being successful outside bankruptcy is to not fall for the same traps that you did in the past. The fact that you have done a cash flow statement and have gotten a grasp on your expenses is a great first step in keeping your financial affairs in order.

The first thing that I would recommend is to build an emergency fund of money. My belief is everyone needs three to six months of living expenses that they keep liquid to be used in case of an emergency. This money should be kept in saving or checking accounts or a short-term CD. I recognize that the return you get on your emergency money is very little; however, with this pot of money, return is not the key, but rather, accessibility to the money. Your emergency fund of money is sort of like an insurance policy for your investment portfolio. After all, if you needed money and had to liquidate your investment portfolio at an inopportune time, it can severely cost you. Having the emergency fund of money protects your backside.

Once you have established your emergency fund of money and since your goal is retirement and that is a number of years away, I would recommend that you begin to fully fund an IRA. Since you’re in a very low tax bracket, it would probably make sense to use a Roth IRA. The advantage of a Roth IRA is the fact that the money would grow tax free versus tax deferred. In other words, when it came time to withdraw the money you would not have to pay any taxes. Another potential benefit of a Roth IRA to you is the fact that there’s no minimum required distribution. You can let your money grow in a Roth IRA tax free for as long as you choose.

Bankruptcy is not for everyone and in most situations it probably should not be your first option. However, if you are in severe financial shape, you’re doing yourself a disservice not to consider bankruptcy. I recognize that there is still somewhat of a stigma when you file for bankruptcy; however, there shouldn’t be. We have seen not only individuals, but many corporations use bankruptcy to their advantage and therefore, we should not hesitate to use it where appropriate.

Bankruptcy does wipe out your debts; however, it doesn’t change your behavior. To be successful once you leave bankruptcy, you have to understand the mistakes that you’ve made and correct them. If not, before too long you’ll be right back where you started from. Therefore, whenever you go into bankruptcy you should look at it as an opportunity to do some soul searching and to take a hard look as to how you spend money.

Bankruptcy is not for everyone and there are consequences. However, if used properly it could be a great tool to give you a fresh start.

Good luck!

Rick is a fee-only financial advisor. If you would like Rick to respond to your questions, please email Rick at rick@bloomassetmanagement.com.