Do you have so many debts you don’t know which way to turn? Are debt collectors circling you like a flock of buzzards? Is it so confusing that you just don’t know which bills to pay off first? That can be a very scary feeling. You could even be experiencing physical symptoms because of the stress you’re experiencing. People have actually developed diarrhea, a spastic colon, fibromyalgia or high blood pressure due to debt-related stress.
Take heart. Determining which bills to pay off first is actually fairly simple.
Don’t pay off the creditors that are hassling you the most
The first important thing is who not to pay off first and that’s those of your creditors or debt collectors that are hassling you the most. Just because they’re the most annoying doesn’t mean you should pay them off first. In fact, they’re the ones you may ultimately decide to pay off last or in the case of debt collectors not pay off at all.
Get your bills organized
Have you been letting your bills just pile up unopened? This is the worst thing you could do. You need to open them and then get a piece of paper and draw a line down its middle. On the left side of that line write down the bills for things you couldn’t live without such as your telephone, electricity, gas and rent (if applicable). Then on the same side of that line list those of your bills where you were required to provide an asset to secure them. Typical of these bills would be your auto loan, your mortgage and any other debts where you were required to provide collateral.
On the right side of that line should be all of your other debts including credit card debts, personal loans, personal lines of credit and department store credit card debts.
Here are the ones to pay off first
The bills you will need to pay off first are the ones at the top, left-hand side of the line on that piece of paper. This is because if you don’t pay them they would do you the most damage. You could have your power cut off if you don’t pay a utility bill or if you don’t pay your rent you could be evicted.
Second in priority should be those bills or debts tied to one of your assets like an auto loan or mortgage payment. This is because again failing to pay them would have a seriously negative effect on your life. As far as the bills or debts on the right side of your line, we’ll get to those in just a minute.
If you simply can’t pay on your auto loan or mortgage
If you can’t make a payment on your auto loan or mortgage your best bet will be to contact a consumer credit counseling agency for help. When you do this you will be assigned a counselor who will review your finances and help you develop a debt management plan (DMP). She or he will also contact your creditors to let them know you now have a repayment plan and that they will eventually be paid.
About those debts on the right side of the line
These are the debts that can do you the least amount of damage if you don’t pay them. However, you still need to make a plan for repaying them. The two most popular plans for repaying debts like these are the avalanche method and the snowball method.
You will need a spreadsheet program
You need to get a spreadsheet program and input the name of each lender, the total balance owed, the minimum monthly payment and the day of the month when a payment is due.
The avalanche repayment plan
The avalanche method means paying off first the debt with the highest interest rate as this will save you the most money. You can use the spreadsheet program to order your bills from the one with the highest rate at the top down to the one with the lowest rate. While you’re doing everything you can to pay off that first debt, don’t forget to continue making the minimum payments on all the others.
The snowball repayment plan
While using the avalanche method would save you the most money it will probably also take the most time. This is why many people choose the snowball plan, which means reordering those debts from the one with the lowest balance down to the one with the highest. You should be able to get that first debt paid off fairly quickly, which will then free up money to begin paying off the debt with the second lowest balance and so on. The financial guru, Dave Ramsey, developed this method and named it the snowball plan because as you pay off each of your debts you should become more energized to pay off the next one just as a snowball gains momentum as it rolls downhill. But again, don’t forget to keep making the minimum payments on your other debts.