budget

Many times when we experience a drop in income, it is difficult to know what bills to pay first. You must know which bills are essential to your survival and which are not. There are basically three categories of bills: essential, nonessential and borderline. The biggest mistake you can make when going through financial difficulties is to pay the creditor who is yelling the loudest first. It is important to prioritize your bills when allocating how much money you have to work with. Whether you are having problems paying your bills or not this will help you take control.

The first step in prioritizing your bills is to know exactly how much income you have and how much you are spending per month. Keep a journal of all your expenditures. This includes the trip to the ATM machines, your gourmet coffee drinks, and the trips to the fast food restaurant. Write down every penny you spend for thirty days. You will be surprised at how much you can cut back and apply to your debt. Once you see where your excess spending is going, begin adding the extra money to your bills.

Essential bills are defined as survival and should be paid first. Mortgage or rent payments, utility bills, and food are included in the essential category. The next would be mandatory insurance such as car insurance. Medical needs could also be put into this category. Child support and any loans such as automobiles, furniture, and so forth that are secured or used as collateral to obtain the loans should be included with the essential bills.

Nonessential bills are debts in which no immediate consequences could occur if paid late. They are unsecured and include credit and charge cards, attorney, medical and accounting bills, and newspaper and magazine subscriptions. These should be paid after all the essential bills are paid.

Borderline bills can fall into either essential or nonessential categories. You are the only one who can determine which one. Borderline bills may include such things as life insurance, private schools, child daycare, health clubs, gyms, country clubs, clothing or court judgments. When reviewing your borderline bills you must move them over to either the essential or nonessential category.

By prioritizing your bills in the order of what should be paid first, you will begin to get in the habit of making sure your essentials are always paid first before running into a money shortage.

About the Author

Deborah McNaughton is an author and credit expert. She is founder of Financial Victory Institute, which specializes in financial education. Deborah has programs to train individuals to become credit consultants and teach financial seminars.