Which bills should I pay first in a financial crisis?
How do I make tough choices in tight months and which debts should I prioritize?
Do you find yourself making tough choices about which bills to pay in tight months? In Michigan, 14 percent of individuals reported that in 2015, their household spent more than their income (not including the purchase of a new home, car or other big investment), according to the National Financial Capability Study. This same study reported 18 percent of individuals have medical bills that are past due. If you are struggling to make ends meet, you can prioritize based on what might happen and decide which bills are the most important to pay this month. This article contains recommended steps and suggests several possible strategies.
Gather your bill statements and overdue notices, including any letters from creditors. There are three steps you should take, according to Behind on Bills from the Bureau for Consumer Financial Protection.
- Understand the risk of not paying certain bills now. What things do you need to keep or get a job, like transportation, childcare, tools or work uniform? To stay housed and keep your utilities connected? What insurance do you need to pay for, including car, health, home or renter’s insurance? Do you have other important financial obligations, such as court-ordered child support, other loans or credit cards?
- Assess the pros and cons of your situation. Remember that the costs of losing a place to live add up fast and can make it harder to find a new one. Also, consider consequences, legal or otherwise, of delaying payment. For example, credit card companies might raise your interest rates if you pay more than 60 days late.
- Prioritize your bills. You are responsible for all your bills. If you cannot pay all of them at once, decide the payment order from highest to lowest priority. Keep in mind, if you fall behind on secured debt payments, you can lose your house or car.
Next, you can create an action plan to make this month’s most important payments. Use the Personal Monthly Budget spreadsheet or another budgeting tool to list your income and monthly expenses like rent or mortgage, utilities, transportation, education, childcare, cell phone and groceries. How much do you have left to use for debt payments? How balanced are your income and spending?
Now that you see your personal budget numbers, decide on your strategy. Here are five possibilities to consider.
- Look at each line item and ask yourself if you can increase income as well as if you can decrease or eliminate some expenses.
- If you have to miss a payment, you can try to call the creditor to tell them why and work out a short-term agreement. For example, are they willing to forgive an occasional fee?
- If a certain bill is difficult to pay because of the due date, try to negotiate a new due date which better lines up with the dates you receive your income or benefits.
- Another strategy is to rotate the bills you pay each month. While this is not ideal, it can prevent serious consequences such as losing your car or house, having a utility shut off, or defaulting on a loan.
- Find out if there are local resources to turn to for help. Those listed below are in Michigan:
- Help with delinquent mortgage or property tax payments: Step Forward Michigan
- Paying utility bills: Heat and Utilities
- Getting a bank or debt collector to respond: Michigan Attorney General or Debt Collection or Submit a Complaint
- Help with Benefits or Social Security
- Dealing with Debt: Debt Management or Student Debt
- Help with health care bills, food, child care: MiBridges For medical debt, ask if there is a prompt payment discount, “charity care” or an affordable repayment plan.
- Help finding a lawyer: Michigan Legal Help
Setting goals and planning to pay your bills on time are best practices to help make your financial hopes and dreams come true. Having a monthly budget shows your sense of control to understand your situation and make your action plan. And you will save money by paying down debt to avoid the interest costs from borrowing on credit. Financial planning takes time, patience, and discipline. Find more information about making money decisions and to learn about educational events in your area at MIMoneyHealth.org.
This article was published by Michigan State University Extension. For more information, visit http://www.msue.msu.edu. To have a digest of information delivered straight to your email inbox, visit http://bit.ly/MSUENews. To contact an expert in your area, visit http://expert.msue.msu.edu, or call 888-MSUE4MI (888-678-3464).