How to pay bills

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Prioritizing expenses can reduce the cost of debt while also maintaining essential services needed for day to day household functioning. Knowing how to prioritize expenses can also help ensure adequate retirement planning and avoid having important services cut off.

In order to prioritize expenses, it is important to first have a budget that assigns portions of money to the expenses before they are paid. This budget can help maintain consistency in financial planning and facilitates the prioritizing of expenses.

• Utilities and insurance

Without utilities and insurance, living becomes difficult and potentially dangerous. Without the basics of day to day life, performing income generating tasks, and maintaining focus on other priorities is challenged. For this reason, it makes sense to first pay those expenses that allow one to function in such a way that other debt payments are more likely to be made or facilitated.

• Low balance accounts

A debt prioritization technique advocated for in the ‘Military Spouse Finance Guide’ is snowballing debt. This method starts by paying the largest amount to the smallest debt, then rolls over the funds used to pay that expense into the next largest debt. The theoretical affect of snowballing is with each consecutive debt that is paid off, a larger amount of money becomes available to pay off larger debts.  

• Revolving credit

Revolving credit has a greater affect on credit rating than installment debt such as auto loans according to the Fair Isaac Corporation, paying down revolving credit such as credit cards has the greatest impact on credit score in terms of debt payment. Due to this, and the idea that credit cards often tend to have higher interest rates than auto loans and other types of installment loans, prioritizing credit expenses first can be a good idea.

• High interest debt

Naturally, high interest debt should also be paid. Even if it is just minimum payments, keeping this type of debt in check and on slow balance decline is useful in reducing overall debt and improving credit score. If this type of debt only constitutes a small fraction of total income and a large amount of total expenses, paying it off slowly helps maintain a credit history.

• Retirement expense

Saving for retirement may be put off and neglected for more immediate financial concerns. To an extent this makes sense, but eliminating retirement expenses from a budget altogether can be a bad idea. The earlier one starts contributing to a retirement fund, the less money is needed to include this expense among financial priorities so it makes sense to start early even if it means paying debt off more slowly.

Another key factor in properly prioritizing debt is managing new expenses. If the U.S. Bureau of Economic Statistics is a valid indicator, the U.S. national saving rate ranged between approximately one and seven percent between 2004-2010. This means a high rate of expenditure is prevalent throughout the country and that prioritization of debt can be helpful.

In light of national savings levels, new expenditures might best be avoided in order to lower debt to income, and credit to credit limit ratios. Since many people have higher debt and credit ratios, the task of prioritizing debt is made more difficult. However, if no new expenses are taken on, and expenses are less than 99 percent of total income, the prioritization of expenses can be beneficial when budgeted for accordingly.

How to manage your debt

Debt doesn't have to be a bad word nor does it have to be out of control spending. Debt exists for a couple of reasons, specifically to fund opportunities that will yield a greater return in the long run and to finance expenditures that are too large to pay all at once.

Sometimes, however debtors may misjudge future cash flows or a change in monthly budgets can occur making previous debt a potential problem. When debt does become out of control certain debt management techniques and methods can be utilized. This article will discuss debt management in terms of 1) budgeting and cost management, 2) debt management resources, and 3) debt ratios, interest rates and consolidation loans.

Budgeting and cost management

Budgeting ideally has an allowance for emergency expenditures and unforeseen financial events in addition to debt payments. If debt has become too large or is costing too much paying down balances can both lower interest charges and total amount due. To be able to pay down balances, one must have room in one's budget to do so. Thus, a good budget will make possible added debt payments to pay down balances.

In a nutshell, creating a budget involves balancing income with expenses so that there is additional money left over to save. The reason why budgeting is an important part of debt management is that it helps one plan for a consistent and possible paying down of debt that is realistic. To see a how a budget looks and can be make, click on the following sample budget.

Cost management is similar to budgeting in the sense it plans out the allocation of money for specific uses. However, with cost management, specific debts are reviewed for the most optimal payoff, use of debt payment funds, and cost reduction. For example, if an individual has 3 credit card balances over $2000.00 each with balances in excess of 10%, but their credit score is above average, there is a chance that individual may be able to consolidate the loans at a lower interest rate so more principal is paid with each payment and so that payments may potentially be reduced in order to reallocate funds. 

Debt management resources

There are several means outside of budgeting that can assist in debt management and provide debt
management help to those seeking to obtain greater control of debt. A few of those means are provided below:

• Debt management credit counseling
• Debt management relief
• Debt management programs
• Debt management companies

It may not always be necessary to use one or more of the above debt management help resources, however in some cases they may assist a debtor in finding ways to reduce debt that one might not have otherwise thought of. For example, some credit counseling companies negotiate debt interest rates with creditors and help establish affordable payment plans at lower interest rates so the debtor can pay down the debt more reasonably.

If one chooses not to use a credit counselor, one may also employ the help of a financial planer or financial services firm that is also a debt management company. These types of companies may work with more than just one's debt, but income, savings, expenses, goals etc. to come up with a more complete financial planning and debt management program. Individual debtors may also establish a debt management program for themselves by paying careful attention to cash flow, interest, expense and income details and formulating a practical debt management plan in light of those factors.

Debt ratios, interest rates and consolidation loans

To gain control of one's debt, a debtor may make use of three additional techniques namely debt ratios, interest rates and consolidation loans. The debt ratio is one's asset level in proportion to debt. For example, one may have personal assets valued at $50,000.00 and total debt of $32,000.00 the debt ratio divides the former by the latter thus 32K/50K=64% debt to assets.

One may also calculate a debt to income ratio by dividing total monthly income by total monthly debt. For example, with an income of $3000.00/Month and total debt of $2000.00/Month one's debt to income ratio would be 66.66% of income. Moreover, even though one's debt to asset ratio might be one percentage, one's debt to income ratio might be a higher number. Generally, the higher the ratio percentage, the more concerned one should be about managing the debt.

To manage high debt ratios a debtor can either renegotiate interest rates, pay the debt down or consolidate total debt into a lower interest form of debt. Debt management companies and credit counseling companies may assist with this, but individuals can also perform these tasks with a little research, comparison shopping and a few phone calls to financial institutions. There is a good chance one can lower debt costs especially if previous debt management techniques haven't been made use of.

Managing debt may seem overwhelming at first but it is possible to get debt under control using the tips provided in this article and/or with other debt management help methods. A key factor in debt management is understanding the debt, what the solutions are and what needs to be done to either reduce, eliminate or gain better control of the debt. Sometimes the debt management process can be performed in a short period of time, whereas at other times it may take longer. The size of the debt, number of creditors and types of debt typically will have bearing on how quickly and effective debt management tools will start being effective.