A lot of what I’m talking about on this site only works if you have more money coming in than going out. That’s really the only way finances can work successfully. Like I talk about in my post The Three Money Rules and How to Follow Them, you can’t become financially secure unless your income is more than what you’re spending. So what do you do when all of your bills for the month add up to more than what you make? Well, first there are some things that you shouldn’t do, then there are some things that you should do depending on how bad your situation is, finally there are some things you should do to dig yourself out of that hole forever.
This post is for when you’ve already canceled cable and other things you don’t need. This post is for when you’re trying to keep the lights on and food on the table.
What you shouldn’t do.
- You shouldn’t take out a payday loan.
This is one of the worst things you can do. Payday loans have ridiculously high interest rates. They really aren’t designed to be paid off. They’re designed to keep you in a cycle of paying more and more until you can’t afford to pay. Not all companies that offer payday loans are unscrupulous like that, but there are many that are.
- You shouldn’t charge more on your credit cards.
This can be difficult, but adding more to your pile won’t help you pay your bills in the long run. It might be a short term solution, but usually by this point that option has passed.
- Don’t pull money from your retirement accounts.
Many times people will pull money from retirement accounts to pay for debt. This can hurt you more in the long run than the bad credit from not paying your bills. The money in your retirement account will continue to grow. Money in your retirement account is usually untouchable by creditors even in bankruptcy. Make this a last resort.
What you should do.
- Look at your expenses.
Most likely by this point you’ve already done this, but it doesn’t hurt to repeat it. Cut out anything that is extra. You don’t need cable. You don’t need a gym membership. You need food to eat and a roof over your head.
- Pay the essentials first.
Pay the most important things first. Shelter and food. Always make your rent or mortgage payment if possible and put food on your table. It is very difficult to find new housing if you are evicted. And if you don’t eat you won’t be healthy enough to make things better. Being sick can also increase your costs.
- Prioritize your bills.
Some bills are more important than others. Look at your bills and determine what is most important. Make sure those get paid first. Pay the rest as you can. Here are a few suggestions to help you prioritize your bills. Pay for your needs, then your secured loans, then your unsecured loans with any money left over. Pay for your home first. Make sure you have money for food. Then make sure you can pay for utilities like electricity and water. Then pay for any secured loan on something you can’t live without. Secured loans are loans where the bank owns the item until you pay it off. This might include your home or a car. After that, pay your unsecured loans. These are the things like credit card bills, student loans and personal loans. The things where the creditor can’t take anything away from you for not paying.
If some of them are particularly old. For example, if you have a credit card loan that you haven’t paid on in several years. That should be put at the bottom of the list. Unpaid credit loans that haven’t been paid in 7 years are required to be removed from your credit report.
- Contact your creditors.
Creditors are businesses. They want to make back the money they loaned you. If you call them ahead of time and tell them that you can’t make the payments, but are willing to pay them back they may work with you. Most banks have departments dedicated to working with people that are having trouble paying their bills. When you call them tell them that you can’t pay the bill and tell them what you can pay and ask them what they can do. They may be willing to change the interest rate, change the payment schedule, temporarily suspend payments, or many other things to help you out. The key is to start talking to them early.
- Determine what’s not worth paying.
If you truly can’t pay all of your bills you may have to pick what you can give up on. Make sure you pay for things you can’t live without; home, car, food, utilities. Most anything else may hurt your credit, but won’t hurt you. Unsecured loans, like credit card debt, are easily the first to go. If you don’t pay them it will hurt your credit, but they can’t take your things away.
- Consider bankruptcy.
Bankruptcy can be a scary thought, but it can also solve a lot of problems. Bankruptcy can allow you to renegotiate payment schedules, adjust interest rates and even delete some debt. It is also cheaper and easier to do than most people think. You will need to talk to an attorney, but it can help you reorganize or completely eliminate much of your debt. It all depends on your situation.
How to dig yourself out.
- Create a budget.
The first step in digging yourself out and getting on the road to financial security is to set up a budget. No matter what brought you to this point, whether it was a job loss, medical emergency or some other event you will need to set up a new budget for your current situation.
Look at how much money you’re making. Then list all of your expenses. Write down how much each one is per month. If they aren’t the same each month then estimate what you think it will be. I recommend estimating high just in case. I also recommend having a line item for “Other” to cover all those little things that just come up. And be sure to add a line item for “Savings”.
- Develop a plan.
When setting up your budget start developing a plan to pay your bills and put money into savings. The savings will help prevent this type of situation in the future because it will give you a cushion. Look at things like how long it will take to pay off the debt with what you pay each month. As part of your plan, adjust the numbers in your budget to find something that works.
- Bring in more money.
There are a lot of ways that you can bring in more money. If a job loss caused the problem with paying the bills then a new job may be the priority. Until then there are a number of other ways you can start to bring in more money. Either temporarily or as a permanent side gig. Things like a second job, side work, or even doing online surveys can help. See my list Way Too Many Ways to Make More Money for some ideas.
Not being able to pay all of your bills in a month can be very stressful. It can be easy to let it get the best of you. It’s important to try and take a step back and look at your situation. Find comfort in education and planning. If you develop a plan then you can get the important bills paid and have a way to deal with the things that won’t get paid. Good luck.
Anything I missed? What other things are important when you can’t pay all of your bills?