The Short Answer
Knowing your monthly expenses is the hardest — and most important — part of building a post-bankruptcy budget. The key is "financial honesty": an accurate, unsentimental look at what you actually spend, not what you think you spend. Track every purchase for at least two months using a notepad or your bank statements, then categorize and total everything. Pay special attention to variable expenses like food, gas, and car maintenance — those are where most budgets quietly fall apart.
In our last blog post we talked about the first step of budgeting after filing for bankruptcy, which was knowing your income. I mentioned in that post that I believed determining your income was the easiest of the five steps in building your budget. Unfortunately, I think the second step, knowing your expenses, is the most difficult step of building your budget post-bankruptcy.
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
“Financial Honesty”
In building a budget I believe the most important quality is “financial honesty”. So what exactly does that mean? Financial honesty is the ability to honestly look at your expenses and determine what can go and what can’t go.
For example, it’s easy for me to say that I spend $400 a month for food on a family of four. That’s $100 a week at the grocery store and should suffice, right? Probably not. If you budget only $400 a month in food you are setting yourself up for failure. Think about this – that means you spend $1.11 per person per meal. That’s too low. You might be able to make that work for a month – maybe even two, but it’s not a long term, feasible budget for food. The point is, you have to be realistic, or financially honest, with your budget.
There are a couple different ways people can get an idea of their expenses. One way would be to simply carry around a small pad of paper and a pen or pencil to write down your expenses. Write down everything! Literally, everything! Do this for at least one month but ideally you would do this for two or three months. Using this pad and paper you can then go through and add up your different expenses. Categorize your expenses and get your total monthly expenses for each category.
Another way to accomplish the same task is to look at your bank statements. If you are like me and put everything on a debit card then you can easily look back at your statement and categorize your different expenses. However, watch out for cash withdrawals. Unless you write down what you are spending cash on you won’t have an accurate budget that shows what you are spending money on.
Fixed Expenses vs. Variable Expenses
Typically, expenses can be classified into one of two categories. Expenses will either be fixed or they will be variable. Fixed expenses that will remain the same from month to month. Think of your mortgage payment (as long as you don’t have an adjustable rate mortgage), car payments and insurance. On the other hand, variable expenses are exactly what they sound like – they are variable. They change from month to month. Examples of variable expenses include the electric bill (big difference in winter and summer), gas for your vehicle, food and most other expenses.
Your fixed expenses are pretty much set. You can’t do a whole lot to lower those payments each month. However, variable expenses are what can make or break your budget. Knowing your variable expenses is at the core of a good budget.
Hidden Traps of Expenses
I’ve already mentioned one of the biggest hidden traps for budgeting and that is your food. Make sure you track your food budget for a couple months to get an accurate estimate of what you are spending. Other trouble areas we have seen after doing thousands of bankruptcies are things like car repairs and taxes. Let me elaborate.
After tracking down your expenses using your pad of paper and pen or pencil or by using your bank statements if you use a debit card you should have a pretty good idea of what you are spending each month. You may be confident that you spend no more than $200 a month on gas. You’ve tracked the last two months and each month you’ve spent about $190. However, what about oil changes? Tire changes? Other repairs and maintenance to your car? If you don’t budget your transportation expenses a little higher then you won’t have the money set aside for these types of expenses.
Similarly, we have seen a lot of clients who have come in who are self employed. Problem is, they haven’t set aside taxes each month. When tax season rolls around, they are hammered with a tax bill and have no money to pay it. If you are self-employed, a contract worker, or if you receive a 1099, then be sure to set aside anywhere between 20 – 30% of your income for taxes. If you don’t do this then you have dug yourself into a hole that will be tough to get out of. Remember…death and taxes are always certain!
There are certainly other areas that people often overlook when building their budget. It is critically important to track your expenses and look closely at your monthly expenses. After doing this, begin a draft of your budget. Remember, above all else, you have to have financial honesty. The goal is to live below your means and set aside money for emergency situations and savings.
Key Takeaways
- Financial honesty means budgeting what you actually spend, not an optimistic estimate — unrealistic numbers will cause your budget to fail within months.
- Track every expense for two to three months using a notepad or debit card statements before you attempt to set spending limits in any category.
- Fixed expenses like mortgage and car payments are largely unchangeable, so your focus should be on understanding and controlling your variable expenses.
- Food is one of the most commonly underestimated budget categories — $1.11 per person per meal is not a sustainable real-world food budget for most families.
- Budget for irregular but predictable costs like oil changes, tire replacements, and car repairs by spreading those annual costs into a monthly "transportation" line item.
- Cash withdrawals are a silent budget killer — if you use cash regularly, write down every purchase or you will have a gap in your spending picture.
Attorney Insight
The mistake I see most often is clients who come in after a Chapter 7 discharge feeling relieved — debt gone, fresh start — and then slide back into financial trouble within two years because they never built a realistic budget. Food and transportation are the two categories that blow up almost every spending plan I review. Someone will swear they spend $150 a month on car expenses, but once we account for insurance, gas, oil changes, and that unexpected tire last spring, it's closer to $400. Getting honest about those numbers before a crisis hits is what separates people who truly rebuild after bankruptcy from those who end up back in my office.
