Which Bill Should I Pay First?
Eileen St. Pierre, The Everyday Financial Planner
It’s easy to become overwhelmed when you are in debt. The first step is to realize that getting out of debt is not going to happen overnight. You need to develop a plan. Here are three simple steps:
Step 1 – Look at the timing of your bills.
How often do you get paid – weekly, bi-weekly, or monthly? List all your bills and your due dates. Is it possible to change any of the due dates?
- If you get paid twice a month, you want to pay roughly half your bills at the beginning of the month and half at the end.
- This way you smooth your cash outflow.
- I’ve never heard of a creditor being unwilling to change the due date – you just have to ask.
Take another look at your W-4 at work. Do you have the proper number of withholding allowances (claimed exemptions)? The higher that number, the less money is deducted for taxes. Many people list 0 so they get the maximum tax refund.
- If you are married and have 2 kids, then you should claim 4 exemptions.
- If you are having trouble paying your bills now, waiting months for a large tax refund check doesn’t make sense.
- For more information, read my post Check your W-4 withholdings: You may be giving the government an interest-free loan.
Step 2 – Determine your payment priorities.
What do you really need?
- A roof over your head
- A way to get to work
- Utilities turned on
You have to be able to pay for your needs.
Where can you cut your expenses?
- Cell phone/cable plans
- Eating out/entertainment expenses
- Car insurance coverage/deductibles
- Personal expenses
Ask yourself – Do I really need this or do I just want it?
- For example, you need to have car insurance coverage, but do you really need to have a $250 deductible?
- If you increase your deductible to $1000, your insurance premiums will go down and you can use the freed up money to pay down other debts. Or better yet, you can put the money you saved into an emergency fund to avoid taking on more debt in the future.
Step 3 – Determine how much money you have to put towards your bills.
Let say after paying your rent, your car loan, and your other essential needs, you only have $200 a month to put towards paying down your credit cards. Focus on paying down the debt with the lowest balance. Just make the minimum payments on the other credit cards.
- By reducing the total number of debts you have, you’ll get an emotional boost.
- Some financial advisors recommend you pay down the highest interest rate debt first, but if it takes you 5 years to do it, you may lose hope and give up.
- Once you pay off the first card, take the money you had been paying on that card and put it towards the next credit card balance. Remember, you have already budgeted this money to pay bills. So you should be used to not having this money to spend on other things.
- Keep repeating this cycle until you have paid off all of your credit cards.
We call this accelerated debt payoff scheme “The Snowball Effect.” I’ll provide a more detailed example of it in next week’s blog post.