The Short Answer
The first step to building a workable budget after bankruptcy is knowing exactly what you bring home each month. The most reliable way to do that is to review at least six months of pay stubs or profit-and-loss statements — not just one or two. This gives you a true average that accounts for weeks when you're paid more frequently. Be careful to separate out irregular income like annual bonuses or seasonal overtime, which can make your income look higher than it really is on a typical month.
As a bankruptcy law firm we have filed thousands of bankruptcies for people all across North Carolina. During our years of experience we have seen almost every scenario you can imagine that would lead to someone having to file bankruptcy – whether it is a sudden illness with unexpected medial expenses, loss of a job, divorce, climbing interest rates on credit cards, repossession of a vehicle or the foreclosure of a house.
There are, without a doubt, times where bankruptcy is unavoidable. However, we most regularly see situations where the road that led to bankruptcy was a gradual process. It was a slow financial leak instead of sudden break of the financial dam. In order to ensure that our clients make bankruptcy a once in a lifetime event, we work hard with them to ensure that their post bankruptcy life is one that is financially balanced and as stress free as possible.
The number one way to ensure that your financial life is balanced and less stressful is by creating a monthly budget. Believe me, I know this isn’t easy. I know it takes time and is more stressful than not knowing the reality on the front end. However, creating a monthly budget will help you avoid the financial pitfalls that have led to bankruptcy.
So, with that said, here are five easy to follow steps to create a budget.
Step #1: Determine Your Average Monthly Income
Step #2: Know Your Expenses
Step #3: Create a Balanced Budget
Step #4: Review Your Budget Regularly
Step #5: Use a Technology to Help You
Step #1: Determine Your Average Monthly Income
Out of the five steps necessary to create a truly workable budget this is probably the easiest. In order to know what you can spend each month you have to know what you are making. What we have found to be the easiest way to do this is to get at least your last six months of paystubs or profit and loss statements. Using these paystubs or profit and loss statements you can get an accurate idea of what your net income is each month.
Can this be done even more easily? Of course it can. However, I fear simply using one month may not be as accurate as necessary. If you are paid every two weeks there will be some months where you are paid three times. If you are paid every week then you will be paid five times in a month periodically. Regardless, a six-month sample allows you to get a pretty accurate estimate of what you are actually bringing home each month.
Another area to closely watch when determining your income is bonuses and overtime. If you get an annual bonus and it happens to be in the six-month period you are looking at then it could overstate your income. Same thing with overtime, if you have seasonal overtime be careful not to overstate your income annually by only looking at your “peak” period.
Failing to spot irregular income such as bonuses or overtime may inflate your income, which will cause your budget to be inaccurate and destined for trouble from the beginning.
Determining your income is, without a doubt, incredibly important. However, in my opinion, the most important step of the five-step process to creating a budget is the second step. If you are unable to accurately determine your monthly expenses, then your budget is worthless.
Key Takeaways
- Use at least six months of pay stubs or profit-and-loss statements to calculate your average monthly net income — one month is rarely accurate enough.
- If you're paid weekly or biweekly, some months will have an extra paycheck, so a six-month average smooths that out.
- Annual bonuses and seasonal overtime can significantly overstate your regular income if you're not careful to treat them separately.
- Your budget is only as reliable as the income number you build it on — an inflated starting figure sets you up to overspend from day one.
- Knowing your true net income is the foundation of every other budgeting step; without it, the rest of the process cannot work.
Attorney Insight
The mistake I see most often is clients building a post-bankruptcy budget around their best month, not their average month. Someone gets a quarterly bonus or picks up heavy overtime in the summer, uses that number as their baseline income, and by October they're already behind. After nearly 30 years of handling bankruptcy cases across North Carolina, I can tell you that most repeat filers didn't fail because of a catastrophe — they failed because their budget never reflected reality from the start. Getting the income number right isn't glamorous, but it's the one thing that makes every other financial decision downstream either work or fall apart.
