An Emergency Fund: Your Life After Bankruptcy Lifeline
The day you get out of bankruptcy will be a great one. You will be free of most of your pre-bankruptcy debts, and have the opportunity to get a fresh financial start.
Now your goal must be to conquer the challenges of rebuilding your credit and establishing new financial goals. When you emerge from bankruptcy, you will be left with few or no credit cards. Many of your pre-bankruptcy sources of credit will be gone, and to maintain your commitment to financial well-being, you're going to have to find other ways to cover any emergency bills that may arise. To be ready for these emergencies, you need to set up an emergency fund.
What is an emergency fund?
An emergency fund is a reserve of ready cash that you will use to cover emergency expenses while you are back on your feet after bankruptcy. Typically, you should place three month's worth of your average monthly expenses in your emergency fund.
How do I build an emergency fund?
You may well wonder how you're going to find the funds to start an emergency fund when you're just getting out of bankruptcy. As we explain in more detail in What Happens After Bankruptcy?, many people are forced into bankruptcy because they are unable to control their spending. For example, instead of saving small amounts of money every week, they buy expensive, gourmet coffee, go out for lunch every day, or put money in the weekly lottery. Although these types of expenses may be small individually, when totaled up over a year, they can run into the thousands of dollars.
For example, do you play the lottery? Do you religiously plunk down 20 bucks every week on your favorite numbers with the thought that you'll never really miss those 20 bucks if you lose, and that if you win, all of your troubles will over?
Leaving aside the almost overwhelming odds against you that you will ever win a significant amount of money in a lottery (according to most experts, you're more likely to be struck by lightning than to win the lottery), you should think about how your money would grow if instead of spending it on the lottery, you deposited it in a savings account. Instead of putting those 20 dollars in the lottery every week, if you deposit that amount weekly in a savings account with 4 percent interest, and don't touch the money for 18 years, you will have saved more than $27,000. Meanwhile, during the first three months of your non-lottery existence, you will have saved $260 for your emergency fund. This sacrifice may only be temporary, but the peace of mind you will gain will have long-lasting effects on your financial outlook.
Where do I put my emergency fund?
If you have small but recurring expenses for nonessential items like these, you can start building your emergency fund by giving up these expenses and placing the money into your emergency fund. Ideally, the money should be placed in a savings account or some other account where you won't have ready access to it and won't be tempted to spend it. You also will need the discipline to hold on to the money until you have a real emergency. If no emergency arises, you'll have a nice source of savings for that rainy day down the road.
Once you build up about three months of expenses for your emergency fund, congratulate yourself. Not only have you established an important cash reserve for emergencies, you will also have proved to yourself that you can control your spending and save money-two very important skills for your life after bankruptcy.