Many people have a do first then learn later lifestyle when it comes to personal finance, but what if we propose learning before we take action. First off the purpose of the post is to educate and help anybody before getting into financial despair. But if you are already at that point then you might want to buckle down to change your life immediately before digging yourself in a deeper hole. Did you know that the number one reason for bankruptcy is emergency medical expenses here in the US? Another reason is loss of employment that can leave a family in financial ruin. Now I ask you, do you have a road map when in financial despair. I hope you do, but if you don’t then keep reading as I will give my best to provide you the tools you may need to overcome any financial obstacle.
See below for the roadmap when in financial despair.
Pay these Necessities when money is scarce in the order below:
- Utilities – Heat & Lights & Water
- Food – No Steak or Shrimp, Use $$ wisely
- Rent & Mortgage – Keep the landlord happy
- Transportation – Gas & Any Car Payments
- Insurance – Medical Only
- All debt – Snowball Method
- Clothes and Toiletries. – Only if needed
- Any Other Necessary Bills
Now with each step your money should be directed efficiently and do not move on or jump any steps. People get into trouble when they pay step 6 first before step 3. Always make the credit cards wait, and handle food and rent first. Many people pay the credit card companies first for fear of defaulting, but it should not be that way.
Random Financial Action Plan:
-Do you owe the tax man 30K in back taxes? – If this is you right now you must allocate any extra money you have to pay them as soon as possible because the IRS charges penalties and late charges that can really add up. After you have taken care of the most critical life necessities this should be next in line above any student loan or credit card debt.
-Do you owe the same amount in credit card debt as your annual income? Well if this is you I feel horrible to tell you that your best bet might be to file bankruptcy if you do not have a way to make extra income. The only way to avoid bankruptcy in this situation would be to sell something big like a car or a home to pay down 50% of the debt. If the debt is less than 50% then it might be manageable enough to do the debt snowball.
-Do you owe 100K+ in Student loans? – This is one of the worse scenarios because student loans are not allowed to be discharged in bankruptcy, so the best route of attack is to pay it down really fast with big payments. Begin paying it before you graduate and get an extra job to tackle it before having kids and or starting a family. Keep living the college lifestyle after you secure the first full time job out of college to help with debt payments.
-Do you owe more on your car than it is worth? – If you can manage the payments without taking money out of your food budget, then continue to pay it off. If it is too much to handle then sell it and pay the difference in the amount you owe from savings. If you do not have the savings then get a part time job in the meantime to cover the shortfall, then sell when you have the savings in hand.
-Do you feel your money can’t cover all monthly living expenses? – If this is where you are financially, only three things can help you. First thing you should do is cut off anything not necessary, cable and gym memberships. Second get another job or increase income someway. Three use any savings as a barrier against adding new debt to alleviate cash flow concerns. Going forward if you do these 3 things you will find your money will last till the end of the month.
-Unemployed and Benefits will run out soon? – Ask the agency for an extension and provide proof that you’re actively looking for work. In the meantime develop networking skills and reach out to old employers. Cut back on anything not necessary and save as much as you can in the interim. Get a part time job in the nights and volunteer in the mornings. That volunteer gig might turn into an employment opportunity.
Comment if you are now more informed with the road map when in financial despair?
Rich Uncle EL
Pic provided by Freedigitalphotos.net
I read a study recently that between credit cards, auto loans and a mortgage, most Americans are least delinquent with their cars. In other words, they pay their car bill before the house or credit cards. That's just crazy…you need to have a place to live!
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I agree with that because the behavior leads me to think, that they are looking forward to living in retirement in their nice looking cars with no house. Thanks for stopping by moneysmart.
I do feel more informed now. It was interesting to me that you put rent 3rd, but it actually makes really good sense there. Also, downsizing or moving in with someone may be an option here as well for those truly in despair… great list
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Yes Mantra, People in financial trouble should not be stuck in a house with no lights or water. It doesn't help you at all. Also you can gauge which of the bills are more lenient than others, and prioritize them based off that.
Good list for "necessities"…too bad so many people put other things into that category which aren't necessities. I had close to $100,000 in student loan debt and paid off the high interest ones, but for the ones in the 2% to 3% range…I'm not in that big of a rush to pay them off. I'd rather invest the money and save some for a downpayment.
OK sounds good. I stayed on that path for a while, but didn't really see too much traction. So Now I am focusing on one goal at a time, as to see bigger results. Debt freedom first before investing.
My recent post Road map when in Financial Despair
I would probably pay my mortgage before my utilities, but I think the big thing would be to make sure you're not in a position where you have to choose what to pay.
I see what you mean, but if money is tight you can always catch up on the mortgage, but the heat, lights, and water are needed first to be able to live in the house.