When faced with mounting debts and bill collectors calling demanding payment, many consumers struggle with which debt to pay first. While there is no single right answer that fits everyone, there are a few guidelines to help set priorities.
Getting out of debt can be hard work and take time. However, if you take a good look at financial obligations and bills, it is possible to make the right decisions.
Begin by creating a budget
Can you tell the difference between want and need? You want those new rims for your tires. You need just the tires. Begin by analyzing your spending. Separate out the necessities of life like rent, food, electricity, from the wants in life like cable tv, your $6 a day Starbucks habit, and gym memberships. Although it is going to be necessary to make some cuts and stick to a budget, make sure the necessities of life are met first. You must have food and any important medical care. Make sure you take care to control spending in these areas and try to save money wherever possible but make sure the basic needs are met. Necessities include paying the utility bills needed to keep the lights and heat on. They do not include cell phone costs, cable bills or other wants.
Then look at your monthly after tax income. This is what you have to not just pay your bills but hopefully put a little away each month.
Look for lost money
Before you start cutting back all the fun in your life. Look for lost money. When we decided to get serious and be debt free. Our first stop was to look and see where we could save money on our essential services like electricity, our cell phones, and internet service. One of our friends was in a direct sales company that helped people cut down on those services. So we filled out her customer service online survey and she created a plan where we ended up saving $80 a month on our cell phone service and $60 a month (more in the winter) on our electricity bills. Not bad. Then she took it one step further by showing us a referral program that would allow us to share our experience with friends and if they became customers, our service would become free. Once we took that next step. Our monthly savings went to $160 in cell phone service and we are still working on referring people for the free electricity. (Want to help us out AND save money? Please fill out this form ! )
What to pay first
Know that you have looked at your bills and found where you can save money. Its time to start paying down your debt. Although it is going to be necessary to make some cuts and stick to a budget, make sure the necessities of life are met first. You must have food and any important medical care.
Whether you rent or own, it is important to pay your mortgage or rent first. Having a roof over yours and your family’s head isn’t an option. Make sure you pay insurance and real estate taxes. If you are having money troubles, you do not want to have the home foreclosed or be evicted. If you haven’t already taken advantage of the HARP program. Call your mortgage company and ask if you qualify for the HARP refinance. We bought our old home in 2005 we had what we thought was a great rate. But rates fell and because we are self-employed, we couldn’t get a good refinance rate until we found out about the HARP program. We cut our mortgage by 45%! Yes, we did refinance it into another 30 year. But we are currently renting it out as a rental. And it is cash flowing like crazy now!
When you face court ordered child support or alimony, it is essential to honor these bills. If payments are not made, it is possible to face legal action. You may lose your driving privilege or even face prison time.
Keep up with your car payment
A car is a luxury item. So do you need it? When we looked into moving to Chicago (downtown) we considered selling our cars. Parking was expensive and quite honestly a pain to find. Our cars were both paid off and we could put that money into buying a condo w/ a great view!
So really think about whether or not you TRULY need your car. If you do. Look at the current rate. Is it possible to reduce the rate w/ a car loan refinance? Or maybe a personal loan to pay off the balance?
Keep up with student loan payments
Student loans are not as high priority as some other debts on this list, but it is important to keep up with the payments. Check into the possibility of deferring payments or a forbearance. The government can take your tax refunds and deny future financial aid applications for delinquent loans.
Other important bills
At the bottom of the list should be credit card bills, medical bills, and other unsecured debts. While you should attempt to pay these bills since there is no collateral, there isn’t collateral they can come and get if you miss a payment.
Collectors can be very aggressive; however, these bills do not take priority over the more important ones. Work to renegotiate the original terms to lower payments. Most creditors will work with debtors to get some money instead of no money at all.