
Prioritizing Debt Repayment
So, you’re up to your neck in debt. Creditors are calling left and right, reminding you that your finances are in rough shape. Overwhelm is a daily experience and you’re tired of it. But where do you start?
It would make little sense to be current on credit card payments but have no money for gas to get to work. For this reason, Dave Ramsey has created four essential components to budgeting in order to help us stay thankful, relieve stress, and reduce the energy cost of making decisions when facing a long road of debt repayment.
Ramsey and the “four walls” are a great place to start when experiencing this feeling of overwhelm. What bills need to be paid no matter what else happens?
The essentials are as follows, in order of importance:
1. Food
2. Shelter
3. Utilities
4. Transportation
This helps us differentiate between what is a want and what is a need.
With this model, we buy food first. After we’re fed, we make sure the rent or mortgage is paid. After that, we pay the water and electricity bill, followed by assuring that we get to and from work. Prioritizing this way keeps our minds out of the fight or flight state induced by stress overload.
From here, we can focus on what we have left over to prioritize remaining payments.
If cash flow is negative, meaning we have more money going out than coming in, someone has to go without payment. To find out which bill has the smallest impact, write out all left over bills after food, shelter, utilities and transportation are paid for. Then write out the consequence of that bill going unpaid. Which is the least damaging?
Even if we can’t make a payment, a courtesy call will go a long way. Be sure to keep any remaining creditors up to date on your financial status so they know you aren’t ignoring them. They may be more apt to work out the problem with you and give some available options in resolving the issue.
If cash flow is positive, meaning we have more money coming in than going out, this is a good time to establish how much you want to have for an emergency fund. On top this, we can find ways to increase cash flow to get those debts paid off quicker.
