Create Rules and Priorities When Paying Debts

In an ideal world, everyone would have enough money to meet their monthly obligations, reduce debt, save and play. For most people, at one time or another, we do not live in this ideal world. So when you have to make choices, what are the choices you have, and how does a person pick between one obligation and another?

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The first step in any of this process is to budget your income and expenses. You need an objective understanding of your finances before you can properly address your spending and saving habits. Many people spend without tracking or thinking, and get to the end of their pay cycle with not enough to make ends meet, when a little attention to the small things (your daily frozen coffee drink, eating lunch out versus brown-bagging, e.g.) would help you avoid the stresses of “too much month at the end of the money.”  There are literally dozens of tools to use for budgeting (some of which I have talked and will talk about), so I won’t dig deep on budgeting here. But you simply must budget to make things work.

Once you have done the basic leg work of budgeting, I think planning to save is a next step. Most people work for employers who offer a tax-deferred retirement contribution (often with a match!), or have access to other tools like Roth IRAs. If you can, and especially if you get an employer match, setting aside automatic savings will remove the money from your temptation to use, and establish a savings habit your older self will thank you for.

Finally, you have to pay your other obligations. You need to decide which creditors get paid first, which last, and if need be which creditors will do without. Many of my clients over the years have responded to being unable to pay all their debts by either paying none, or paying the creditors that bother them the most. Neither of these are necessarily good ideas.

When decided which mouths to feed, start with your own. You need to be able to eat, keep your utilities on and your car insured. Then I would start with the creditors that have the most actual power - your mortgage and car lenders. Since these are secured creditors they have the ability to take your property (the house or car) if you default in your payments.

Finally, last on the list, are consumer debts - credit cards, medical bills and the like. If you have enough left to be able to properly manage all these debts, then do so with an eye to repaying them as quickly as you can.  If you don’t then you can begin by working with the creditors to arrange alternative payment plans, or in the worst case, not paying them at all. (It’s at this point that I recommend talking to an expert like a bankruptcy attorney.)

Beyond that, do try if you can to give yourself some room for fun. The psychological toll of not being able to recreate can weigh as heavily as the stress of too many bills. There is a balance to be found, but do try to strike it.  In the end, a mediocre plan is better than no plan at all. The worst-case scenario is the plan fails, after which you will simply need to make a new plan.