Author Topic: Overdue bills (power etc) vs debt vs buffer ?? which first  (Read 4819 times)

Hudson

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Overdue bills (power etc) vs debt vs buffer ?? which first
« on: November 01, 2014, 05:35:56 PM »
Which sequence should these be approached with ?

I'm inclined to pay the power  etc first. While I could hold them out for a while the balance owing will just keep growing..ultimately leading to a large sum owing.

The buffer (emergency fund) vs debts ??? I was thinking of saving $1000 first and then attacking debts.

Any pros/cons to my approach ?

thanks

tofuchampion

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #1 on: November 01, 2014, 06:16:08 PM »
Overdue bills first.  Get caught up on the regular monthly things; this will eliminate a lot of stress as well as save you from paying hundreds more in late fees, etc.

Then buffer/e-fund.  Are these the same for you?  I'm thinking of "buffer" in a YNAB context, where you live on last month's income.  Not the same as an emergency fund.  Anyway, if you're also looking at a buffer that way, I'd say do a separate emergency fund first.  Then the buffer.

Then you start attacking debts.  Once you're caught up on your normal bills, and you have some emergency money, as well as being out of the paycheck-to-paycheck cycle, you'll have a lot more cash available to throw at debt.  This approach will also ensure that an emergency or other unexpected expense won't add to your debt.

Good luck!

jexy103

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #2 on: November 01, 2014, 07:40:19 PM »
Definitely the overdue bills if they are utilities/essentials. If they're overdue credit cards, you'll pay more in fees but they may have to wait until you get your electric bill caught up.

I think you would really benefit from reading a little bit of Dave Ramsey's advice. I started with DR about three years ago when I had $30,000 in debt, and "graduated" to MMM after learning what I could from DR's method. He advocates paying for the "four walls" first- housing, food, transporation, and clothing. Keeping up with your rent/mortgage and utilities is your first priority; it's hard to show up presentable at work if you're being evicted or don't have water/electricity. Next is food. Buy cheap food that meets your nutritional requirements. Beans, rice, potatoes, etc are all cheap and filling. Transportation to get to work if your next priority, though commute as cheaply as possible. Clothing is also essential, but most people can get by on what they currently own for a few months or a year while you get yourself out of debt.

Once you're caught up on overdue bills, DR advocates saving $1,000 in a baby emergency fund (as you mentioned) so you don't have an unexpected expense and end up behind again. Next, pay off all your debt. Many here prefer to focus on highest-interest rates first, which is mathmatically advantageous, but depending on how tight your budget is compared to your monthly minimum payments, sometimes you'll need to knock out a few small debts so you have some more disposable income to put toward the other debts.

Once you're out of debt, go back and pad your emergency fund to cover 3-6 months worth of expenses and then invest. During all of the above, look for ways to increase your income, decrease your expenses, and increase your financial knowledge. Continue reading DR, MMM, etc to stay motivated and learn more ways of increasing income and decreasing expenses. At milestones, congratulate yourself on how far you've come and then keep going. It's a marathon, not a sprint. But if you keep going, you'll get where you want to be. :-)

MrsPete

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #3 on: November 01, 2014, 07:48:27 PM »
Overdue bills first.
If you owe, you should pay.
No exceptions.

MDM

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #4 on: November 01, 2014, 10:13:40 PM »
Which sequence should these be approached with ?

I'm inclined to pay the power  etc first. While I could hold them out for a while the balance owing will just keep growing..ultimately leading to a large sum owing.

The buffer (emergency fund) vs debts ??? I was thinking of saving $1000 first and then attacking debts.

Any pros/cons to my approach ?

thanks
Another vote for overdue utilities first.

The interest rates on your debts should determine whether you pay them next, or establish an emergency fund.  In other words, if you have very high interest debt then you have an emergency and should use all available cash to pay it.  One might consider anything over 10% interest (e.g., many credit cards) an emergency.

See http://forum.mrmoneymustache.com/ask-a-mustachian/spreadsheet-to-test-different-debt-payment-scenarios for a very nice spreadsheet by schimt you can use to evaluate debt repayment orders.

Good luck!

marty998

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #5 on: November 02, 2014, 02:28:11 AM »
Overdue bills are an emergency.

No point stockpiling and saving your fire extinguishers when your house is on fire.

Bikeguy

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #6 on: November 03, 2014, 08:37:57 AM »
Overdue bills.   If am emergency happens,  you can always not pay them next month. But for now,  you are caught up and late fee free.

Gone Fishing

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #7 on: November 03, 2014, 08:44:11 AM »
How did you get behind?  Is the problem fixed?

EastCoastMike

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #8 on: November 03, 2014, 10:52:45 AM »
I think So Close is asking the important question to answer.  Hudson, I can speak from the point of experience.  I've been exactly where you're at.  Sadly, I'm not terribly smart, so I've been there a couple of times.

You're taking a big step by acknowledging you have a problem and trying to develop a solution, but unless you really ask yourself the hard, uncomfortable questions about decisions which led to the financial problem, you risk them reoccuring.  It took me a few times, but I finally figured it out.

You're on the right track.  Good luck.

BaldingStoic

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #9 on: November 03, 2014, 10:54:23 AM »
  • Pay off overdue bills first.  It's your moral obligation, and you'll have better peace-of-mind. 
  • Keep enough of buffer so that you don't bounce checks or find yourself needing a Payday loan, but beyond that pay down debts; prioritized based on the interest fees. 
  • Once  debts are paid off, then find the best return for your money.  I keep my bank account lean since I only get 1% interest and instead park my buffer money in short-term bonds funds.  I then draw these down when big expenses come up like property tax.  Takes 2 business days for funds to be available in my checking account. 

frugalnacho

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Re: Overdue bills (power etc) vs debt vs buffer ?? which first
« Reply #10 on: November 03, 2014, 12:55:41 PM »
Definitely pay the over due bills first.

As far as paying down debt vs building a buffer (emergency fund), it depends on your situation.  If you have a variable paycheck, or don't have great job security you may want to start building a little bit of an emergency fund.  If your job is very secure you probably want to start tackling debt asap to avoid accruing interest and late fees.