Women and Money
Which Bills To Pay First
Thursday, January 01, 2004
Family Circle
I can relate. "Two years ago my husband and I were downsized from our jobs. He decided to focus on launching a business while I sought freelance work. Our income plummeted, and we took out a home equity line of credit and second mortgage to survive. When that ran out, we pilfered our retirement accounts. When they were exhausted, and had to sell our house. Today we live in a less costly apartment, and our freelance income has picked up, but we still dip into our replenished savings more than I'd like, which makes me panicky. If we deplete that, then what?"
We're not alone. The unemployment rate of six percent as of October means that about 8/8 million people looking for jobs can't find them, says Gary Steinberg, a spokesperson for the Bureau of Labor Statistics. Credit card debt has also risen, and credit card delinquencies have been at a record high since the end of 2002. "That indicates things are going on in the economy that are making it harder for people to pay their bills," says Tracey Mills, a spokesperson for the American Bankers Association. What can you do if your family is caught in this bind? If you're getting calls from creditors wanting to be paid now, you may be tempted to pay the ones making the most noise to get them off your back. But that may not be the wisest move. Here's expert advice on which bills to pay in what order.
How to Prioritize Your Debts
Your family's health and well-being come first, says Jill Gianola, owner of Gianola Financial Planning in Columbus, Ohio. "Your need a place to live. That means putting your mortgage or rent at the top of the list." Utility and grocery bills come next, then health insurance if you're paying the premiums, then your car payment sand auto insurance--especially if you live in an area without mass transit. "You need the car to get to work or find a job," says Bill Gustafson, Ph,D, senior director of the Center for Financial Responsibility at Texas Tech University in Lubbock.
Next come credit card charges, medical bills, personal loans and other unsecured debts. If you can afford to keep current with only one, make it credit card debt, say John Ventura, a consumer advocate and attorney in Brownsville, Texas. "Credit card companies are the most aggressive in going after late payments," he says. They may charge hefty late fees and raise your interest rates, says Gustafson, and they're quick to report late payments, this can damage your credit rating and hurt your standing with prospective employers and landlords, who may check credit reports to gage financial fitness.
Don't just ignore the bills you can't pay, though. Having an account written off as bad debt will do more damage to your credit rating. And if you think you're feeling pressured to pay now, says Ventura, wait until collection agencies start calling. Instead, "sit down and calculate how much you can pay on each debt on a regular basis," says Michele Johnson, a board member of the National Foundation for Credit Counseling in Silver Spring, Maryland. Then call your creditors and try to work out a payment plan. You want to make these calls before falling behind to avoid financial penalties and give yourself a psychological advantage. "If you wait until they call you, you're on the defensive," says Howard Dvorkin, C.P.A., founder and president of Consolidated Credit Counseling Services, Inc.� in Fort Lauderdale, Florida.
These calls ay be easier to make if you remember that most creditors want to help you meet your bills.
If creditors are uncooperative, you might want to consider working through a credit-counseling services. "If it's agreed you should go into debt management, a counselor will negotiate with your accounts," says Johnson. To find a reputable service near you, visit the National foundation for Credit Counseling Web site (www.nfcc.org) or the Association of Independent Consumer Credit Counseling Agencies Web site (www.aiccca.org). If you decide to go this route, it's best to do so before your accounts fall in arrears.
Accounts are often turned over for collection when someone hasn't made payments or responded to phone calls or late notices in six months. Collection agencies usually make their money by keeping a portion of what they collect for the creditor or buying debt at a discount and keeping everything they collect. The Fair Debt Collection Practices Act of 1978 restricts where and when agencies can call (no calls at home before 8 A.M. or after 9 P.M., for example) and prohibits them from discussing private financial matters with third parties or making harassing or threatening calls of any kind.
If an agency contacts you, says Ventura, you can buy time by sending a certified letter within 30 days asking that the debt be verified. The agency can't try to collect during this process. Never offer information on where you work or bank that an unscrupulous agency could use against you,. If you can pay part of the debt, try to settle, but don't pay until you get the agreement in writing. If you can't settle, try to work out a payment plan. You can tell an agency, "I can't pay anything now. Please stop calling." But if you pay nothing or too little or ignore letters or calls, the agency may sue---especially if a large sum is at stake. A consumer attorney can advise you on your rights and help you determine if an agency is acting illegally. You can locate one through the National Association of Consumer Advocates (www.naca.net).
Find Me the Money!
If you're having trouble meeting bills, it's time to sit down with your budget and start slashing expenses. Perhaps you can cut back on dry cleaning or renting movies, quit the gym or cancel the lawn services, turn down the thermostat, switch to a cheaper phone plan or sell the second care. "When any of us needs clothes, I hit the consignment shops," says Loretta Vineyard. Allowances are history, and eating out is rate, adults-only treat. "I shop very carefully and cook at home." Once you start looking, says Dvorkin, "you'll find plenty to cut: Other ways to raise cash:
Get creative. "I recently got paid for participating in a halitosis study," says one single mom. Some of Loretta Vineyard's friends are making and selling jewelry. Other people are renting out spare rooms in their homes.
Involve everyone. "The kids got tired of hearing no to everything, so they started working to make money for extras," says Loretta Vineyard. "They're willing to pitch in."
Reduce college costs. Look into scholarships, grants and financial aid, especially if your income has dropped, says Gustafson. Perhaps your child can get into a work-study program.
The prospect of making these cuts may be unappealing, says Dvorkin, "but would you rather keep paying for extras or hold on to your house?" And consider this: If you cut costs in anticipation of a crunch that doesn't come, you'll have a nice nest egg. A recent FAMILY CIRCLE survey found that only 12 percent of families have enough emergency savings. Experts advise tapping other assets in this order:
Stocks and bonds. If you own any, sell them, even at a loss. It's better than raiding retirement savings.
Life Insurance. If you have a cash value policy, try borrowing against it. The interest rate is usually low, and there's no repayment deadline.
401(k) plans. Most allow five years to repay money borrowed, but if you leave your job, the loan is due in full. If qualified unreimbursed medical costs exceed 7/5 percent of your adjusted gross income as reported on your 1040, you can withdraw funds equal to that extra amount if your plan allows it.
IRAs. You have 60 days to repay a withdrawal, and you're limited to one per calendar year. If you have a Roth IRA, you can make withdrawals on contributions (not earnings) because you made them with after-tax dollars. As a rule, though, it's best to try not to touch any of your retirement savings. If you do, says Gianola, "you'll lose quite a bit in taxes ad the ability to grow these savings into a nest egg."
Credit cards. This isn't a great strategy, but you have to do what you have to do to put food on the table, says Gianola. If you must use credit, she says, use it for purchases, not cash advances, which will cost you much more.
Home equity. "If it's a choice between using an IRA and risking losing your home, use the IRA," says Gianola. don't put your home at risk if you can help it. If you're having trouble meeting your mortgage, however, you may want to consider selling. It's better than facing foreclosure, and you at least preserve your credit rating. "But examine costs carefully first," says Gianola. "Remember, it also costs money to move and close on a house."
Look for the Silver Lining
Today's economic climate may qualify as a "worst of times" for many families, but strong ones seem able to remain optimistic no matter what--a trait the FAMILY CIRCLE survey identified as key to family well-being. The Vineyards are one such family. These years of struggle have been "a major-league testing of our marriage," says Loretta. "But through counseling we realized what's important is that we have each other and our children. And the shift was for the better in certain ways. It has helped teach the kids the value of work and money, and my husband, who used to work all the time, has reconnected with us all. Before, he gave us his riches. Now he's giving us himself."
The challenges of surviving these lean times has led to my growth too, forcing me to draw on strengths that I didn't know I had. This process hasn't been easy, but it has been rewarding. I'm now much more confident of my resourcefulness and resilience, and that's a deeply gratifying feeling that now amount of money can buy.
