How to deal with all of the bills?
The first thing you have to do is write down all of your bills. Make
sure you include everything. Start with your fixed debts: Mortgage
payments, car payments, insurance payments, and student loan
payments are good examples of this type of debt.
Next, list your recurring but variable non-discretionary debt: Utility bills, credit card payments, fuel bills, and food bills.
Finally list discretionary spending: Entertainment, eating out, clothing.
Some of these categories are flexible. Clothing, for instance, could be considered non-discretionary. Likewise, are gasoline prices go up and down, other items may have to move between the discretionary and non-discretionary categories. Budgets are supposed to be flexible documents. One of the non-discretionary categories should be savings. Treat that as required.
Video: Preparing a simple family budget
Once you have all of your expenses on paper, you have to add them up. Take the total and compare that to your total income (include all sources of income: wages, investments, child support or spousal support, etc.). If the income is greater than your expense, celebrate. If your expenses are greater than your income, you need to go back to the drawing board. Re-evalute what spending is required and what is optional. Your fixed debts (our first category) are just that – fixed. Those must be paid. Subtract that total from your income, and that gives you the amount you can spend to meet your discretionary spending requirements.
Some people try to make up the shortfall in their budget using credit purchases. While that may, very occasionally, be appropriate (you had to take unpaid sick leave for an illness, but you’re better now, and won’t miss any more work), it almost always makes things worse. If you cannot reliably increase your income you have to cut expenses.
Video: The benefits of having a checking account
How much debt is too much?
There are several measures you can use to determine whether you have too much debt.
1. If you can’t meet your debt service payments, you have too much debt.
2. If your use of credit is making your credit score continually decrease, you have too much debt.
3. If you aren’t putting away retirement and savings, you have too much debt.
To determine whether you have too much debt you need to have information on all of these criteria.
Does it matter what kind of debt I have?
Obviously, mortgage payments that are (hopefully) increasing your equity are different than credit card debt. Even car payments are giving you something you need. However, most revolving credit is for non-capital items, so you’re paying for what you’ve done in the past. You want to avoid that.
You should get rid of your highest interest debts first. They are costing you the most, and moving from 10 open accounts to 5 open accounts will help your credit scores. Lowest rates usually get paid last.
How do I get rid of debt payments?
Paying your bills on time avoids excess interest and penalty charges, and keeps you on schedule to pay off your debt. Consistency not only improves your credit scores, it gets things paid off.
Good payment history also gives you credibility in negotiating for lower interest rates/payments on your mortgage. Having a well laid out plan will also help considerably.
You don’t have to do all of these things alone. There are consumer credit counseling agencies, community college courses, and other community based courses to help with all of these topics. There is even free counseling available at many nonprofit debt consolidation companies.
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