Having debt is not a sin. I’ve been accused of demonizing debt and fear-mongering with my statements on debt, but I believe these criticisms are unfounded. I’ve seen the nasty side of debt and I’m trying to protect you from it. So if you are happy with your debt and don’t ever believe it will be a struggle for you, please stop reading and save yourself some time. You only get 24 hours each day and I don’t want to take the 1% of it or so it might take to work through this article and do what it says. For everyone else, I think today’s article might provide you some useful insight on debt that is rarely discussed.
One of the things I run into regularly in my counseling is someone who truly can’t afford to pay all his/her bills. Whether it is a one-time deal or an ongoing issue, it is an issue with many of you out there. Today I’m going to share my thoughts on how you can prioritize your debts so you can avoid some expensive headaches if (when) something goes wrong. In other words, we’re going to talk about how to make good decisions if something bad happens in your financial situation. The simplest way to do that is to help you determine some priorities when it comes to your bills. Who gets paid if there isn’t enough money to go around?
First, let me lay a foundation and explain the difference in secured vs. unsecured debt. Secured loans are backed by something you will lose if you don’t pay back the loan. Most people know if they don’t make a few car payments that car will magically disappear, courtesy of your local repo man. That’s a secured loan. An unsecured loan is one that has no real backing other than a contract or promise of payment. A common example of this is a credit card. If you don’t pay back a credit card loan, there’s nothing for the company to repossess. So as a general rule, secured loans take precedence over unsecured loans when you have to make priorities.
But let’s go a step further via a quick scenario: if you have $1,500 in hand and are presented with:
- $700 house payment
- $350 car payment
- $500 grocery needs
- $200 utility bill
- $50 Visa bill
Since that math doesn’t work, who gets paid and who doesn’t (for now)? Many would pay Visa first because it is the smallest and they don’t want to get a late fee. That is STUPID. If you can’t eat or keep the lights on, you’ll have a heck of a time paying ANY of the bills.
So here’s your assignment: make a list of every single creditor you owe, how much you owe them (total), when payments are due each month and what the monthly minimum payment is. Then list those debts in order of their priority – think survival mode here. If push comes to shove, who gets paid first? Stop now and make the list…I’ll wait…
Now that you’ve done that, hang on to the list. It is useful to periodically review your priorities…and here’s the thing – you usually make bad financial decision when you’re desperate, and life will sometimes put you there. As the old saying goes, “broke, desperate and stupid usually hang out together.”
So now that you’ve gone through and made your list, it’s my turn. Here’s a general guideline for you to use based on type of debt and its priority. I’ve come up with this list in response to the numerous questions I’ve received from people who have to choose which payment is more important if the math doesn’t add up. This is not an all-inclusive list and to keep things simple, it doesn’t include savings. I hope it will help as a guide and for some discussion.
- If winter, the bill for your primary heat source (if not electric)
- Automobile (unless the car needs to be sold. If so, SELL IT NOW!)
- Auto Fuel/Insurance
- Student Loans (deferment may be an option)
- Credit Cards
- Medical Bills (VERY flexible payment options in most cases)
I’ll close with three thoughts:
- If you have your list that you’d like to send me to look over for input or if you just want to chat about your finances, contact me. I want to help.
- That list, with all those details regarding your debts, is the hardest part of making a workable budget. You’ve jumped that hurdle. So if you haven’t already, sign up for Stacy’s daily emails on the top right side of this page and receive my free booklet on making a budget that works. It will walk you through the rest of the steps and give you worksheets to help. Living on a budget can make all the difference in the world.
- My e-book, From Debtor to Better: The Details of Debt and How to Get Out! goes into a lot more detail than this post ever could on this and more. In 100 pages or so, I go through all the major types of debt and what you can do to beat them. Why not win over your debt? Let me help.