Your mailbox is full of bills and you’re starting to receive phone calls from debt collectors. You know that you need to get your financial house in order, but it seems like you never have enough money to make it through the month, let alone pay down your debts. Digging yourself out of debt may seem impossible, but it can be done. Here is what you need to do to prioritize your bills and get yourself debt-free:

Sit down with all of the bills at once.

prioritize how you pay off debt

In some ways, this is the most difficult step. Seeing all the numbers in black and white can feel overwhelming. But recording your monthly outflow—including due dates, fees and interest rates—is necessary before you figure out how to tackle the payments.

Make a budget.

Once you know how much you owe each month and when, you can figure out how much of your income is needed to pay your bills. If you do not make enough money to cover all of your monthly bills, then you need to start prioritizing what you pay. At the top of the list should be the bare necessities: mortgage or rent, utilities, food, and transportation. With these things in place, you know that you can safely keep a roof over your head and continue working. Any money left over after these necessities are met should go to your other debts.

Prioritizing

After you have covered what you need, it’s tough to know which debts to work on next. While not paying some debts can lead to serious consequences, others offer you some leeway. It’s also important to know your rights.

If you are already being hounded by debt collectors, know that you have rights under the Fair Debt Collection Practices Act (FDCPA). You do not have to put up with harassing behavior, contact at your place of work, or abusive language.

Here are the debts you must pay, in order from the most to least important, as well as a breakdown of what you can expect from each one:

1. Child support. Since these payments are mandated by the courts, failure to pay child support can land you in jail. If you are having difficulty paying child support, you can petition the court to modify your payment. However, that process can take some time and you are not guaranteed a modification.

2. Taxes. Non-payment of property or income tax can lead to the government seizing your home and/or garnishing your wages. Don’t let it come to that. If one of your debts is to the IRS, call them and find out if you can negotiate your payment. While the IRS will not forgive your debt, you can generally work with them to find a solution that will work for you.

3. Student Loans. While student loan debt offers you a great deal of leeway, it’s important to remember that the government can try to collect on defaulted loans in ways that are not available to typical collections agencies. For example, the federal government can take any income tax refunds you receive until the debt is paid, garnish your wages, and potentially take federal benefits like Social Security retirement.

If you are having trouble paying your bills, call and ask to have your student loan put on deferment. It will give you breathing room and keep your tax refund safe.

4. Credit Card bills. Paying the minimum on these will keep creditors at bay, but it will also keep you in debt for a long time. However, these bills should be lower priority than those that keep a roof over your head. Also, though credit cards do not advertise this, they will work with card-holders who are having trouble paying. They would rather you call and explain your situation and ask for a temporary change in your minimum payment, or even a short deferment, than have you simply not pay them.

5. Medical bills. The medical community recognizes the high cost of health care and most hospitals have a financial office that will work with you. For example, my son had to have a minor procedure at a children’s hospital when he was 7 months old. Our insurance covered 90% of the $7000 procedure, but we still had to pay $700. The hospital is allowing us to pay $50 per month without interest for up to 18 months, which will give us more than enough time to pay off the debt.

If you have high medical bills, talk to the hospital about how to make payments over time.

Strategies

Even if you know which bills to pay first in terms of potential consequences, it can still be confusing to know what to pay and when. There are two major strategies for debt payoff: Dave Ramsey’s Debt Snowball, and Suze Orman’s Highest Rate First strategy.

The Debt Snowball

This approach might not be the best mathematically, but it offers a great psychological boost to anyone who needs to know they are making progress. Ramsey suggests that you pay the minimum on all of your debts except for whichever one has the lowest balance. Send however much you can to that low balance debt until it is paid off. Then, send that same amount, plus the minimum you were already paying, to the next lowest balance debt. When that is paid off, send the combined amount from the first two to the next lowest, and so on.

The benefit of this approach is that it allows you to see your progress. Each month, you are still sending the same amount of money to all of your bills, but you are seeing them killed off one by one.

Since you are paying in order of low-to-high balance, rather than paying based on how high your interest is, you may find that you end up spending more overall, however. This is why Suze Orman suggests you use her strategy.

Highest Rate First Strategy

In this case, you list your bills in descending order of interest rates. You will send the minimum amount to everything but the highest rate, and send whatever extra you can to that one. By doing this, you will minimize the interest you will pay over the life of the loans. Once you’ve paid off your highest interest rate debt, move on the next, and then the next.

While this approach makes more sense mathematically, it can get a little discouraging to feel as though progress is very slow. Finding a way to track your progress—like with a debt payoff thermometer that you post in your home—can help to make this strategy feel more exciting.

The Bottom Line

The main thing to remember when prioritizing your debts is that any strategy is better than none. Be proactive by contacting your lenders, and find ways to motivate yourself to pay down your debts. Your consistency will pay off.

Photo credit: Alan Cleaver

Related Articles:

1. The Debt Snowball Method for Reducing Debt
2. Is Dave Ramsey’s Debt Snowball the Best Way to Pay Off Debt?
3. When to Think Twice About Paying Down Your Debt

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One way you might end up with a retirement account is by inheriting an IRA. If a loved one passes and leaves you the assets in an IRA, you can use these assets to your advantage. However, it’s important to realize that there are some interesting rules about how an IRA is passed on — and how you can withdraw money from it.

Beneficiaries

There are many rules when inheriting an IRA

The first, and most important step is to understand the rules about beneficiaries. In this case, the beneficiary’s relationship to the deceased person has a major impact on how the IRA is treated, including whether or not you can continue making contributions to the account, and how and when you can (or must) make withdrawals from it.

Spousal IRA inheritance. The easiest transition is when a spouse is the inheritor. You can choose to designate yourself as the owner, or as a beneficiary. By choosing to name yourself as the owner, you can roll the IRA over into your own IRA – at which point it becomes yours and all the normal traditional or Roth rules will apply to it (contributions, withdrawals, and other rules).

You may also choose to own the account as a beneficiary. This allows you, as a spouse, to withdraw from the IRA with no 10% penalty. For some of those who are not 59 1/2, it can be a good idea to continue to own the IRA as beneficiary so that there is access to the money. Realize, though, that if the IRA is a Roth, the five-year rule applies to when the original owner opened the account. Withdraw before the five-year rule is met, and you could pay income tax (but not a 10% penalty) on the withdrawal.

Non-spousal IRA inheritance. Non-spouse beneficiaries also receive the ability to withdraw without a 10% penalty, no matter their age. However, they have to start taking distributions by December 31 of the year after inheriting. Withdrawals and required minimum distributions can become complicated when you inherit an IRA from someone who wasn’t your spouse. Here is a good explanation from SmartMoney.com. You may also find it helpful to seek professional assistance from a financial advisor or tax pro.

Rules are also different if an estate is involved. An IRA that benefits the estate has to be entirely withdrawn within five years. The exception is if the deceased was already taking required minimum distributions; distributions are then figured based on what the deceased would have been taking.

Realize that the beneficiaries named on the IRA forms trump whatever is in the will. If no beneficiaries are named, the IRA is transferred using whatever rules the custodian has for the occasion.

Transferring Inherited IRAs

When an inherited IRA is transferred from one custodian to another, you need to do what is called a “trustee-to-trustee” transfer. If you don’t do this step right, it can look like you withdrew all of the money — and it can cost you. If you aren’t the spouse, the IRA has to be retitled. This process, for inherited IRAs, requires that you include the name of the original owner and your own name. So it would be worded as: “Name of Original Owner, deceased, inherited IRA for the benefit of Name of Heir, beneficiary.”

It’s a big name, but important. You can also split an IRA, and you should do so if there are multiple beneficiaries. Each beneficiary should receive his or her own inherited IRA for the proper amount. That way, you avoid problems down the road, and each beneficiary is responsible for his or her own inherited IRA.

There are a number of rules associated with inherited IRAs (See IRS Pub 590 for full details), and it’s a good idea to have a knowledgeable attorney or advisor help you with the transfer, and help explain your options. Spouses have more options, and it’s a good idea to get advice before you do anything with an inherited IRA.

Related Articles:

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2. Ask the Readers: Is Regifting an Acceptable Practice?
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In some circles, the last word in smart spending is getting something for the cheapest possible price. While bargain shopping is a good thing, and while you want to feel as though you are getting good value for your money, in some cases it’s worth it to spend a little more money. Here are some ways to figure out if it’s worth spending more:

Will it Save You Time?

Time is money. Even more importantly, time is life. Once time is past, you can’t get it back. As a result, it’s important to be careful about how you use your time. If you can save money, but it takes you a lot of time to do so, it might worth it to pay a little more to have that time to spend with your family, or to do something that you enjoy. There’s a lot to be said for spending a little extra to enjoy a little more time.

Is it Convenient?

I routinely pay $50 more for airfare so that I can leave at times that are more convenient. Yes, I can save money by taking a red-eye. But I don’t want to. I’d rather have the convenience of a flight that leaves at a more reasonable time. It’s easier for the person taking me to the airport, and I maintain a certain level of sanity.

Do You Enjoy the Experience?

Did you bring the binoculars?

My spending priorities often revolve around the experience. I like to enjoy the experience. So, when I go to a play, I pay extra for box seats. It’s a much more enjoyable experience than being somewhere in the back. If I’m going on vacation, I save up enough money so that I don’t have to worry about pinching pennies while I’m enjoying myself. If spending a little extra will significantly improve the experience, and you value that, it could be worth it to spend a little more.

Is it Higher Quality?

Something of a truly higher quality is often worth paying a little extra for. The shoes that last 18 to 24 months, but cost more, are often a better value in the long run than the cheaper shoes that you have to replace every four to six months. From appliances to tools, take quality into consideration. Often, something that costs a little more up front, but that will last you years longer, is worth the extra money you pay up front.

Deciding What’s Worth it to You

Of course, what’s worth a higher price to me might not be worth the extra cost to you. It all depends on what you think is important. My parents have no problem taking the red-eye. The convenience that I think is extremely important (and that affects the all-important experience for me) is not thought of at all by my parents. They happily save the money and take the red-eye.

It’s important for you to take a look at your own situation, and figure out what is important to you, and your lifestyle. If you can afford to pay a little more for something (or afford it after saving up), there’s no reason to go cheap if it’s worth it to you to spend the extra.

Photo credit: Stacey Huggins

Related Articles:

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3. Using and Understanding a Net Worth Statement

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Some people have a hard time spending money, while it easily slips through the hands of others. Why is this?

There are a lot of reasons, but a lot of it has to do with our internal motivations and attitudes toward money. For example, I find it easier to spend money on other people than I do to spend money on myself – especially if I am spending money on my children. It’s not that I’m scared of spending money or that I have an overly restrictive budget. It’s just that I usually have a bigger long term goal for my money than buying myself the latest and greatest in clothing/gadgets/cars/fill in the blank.

What type of spender are you?

When you take a moment to reflect upon your spending habits, you will likely learn a few things about yourself. For example, through the years I have learned that I prefer taking a long term approach with my money, and if I do make a big ticket purchase, I want it to be something that I will truly use and enjoy, not just a purchase that was made to fulfill a fleeting emotion.

Your spending patterns often show direct correlations with your priorities and overall financial health. Good indicators of your priorities can be often be seen in the amount and type of debt you have (for example, large amounts of consumer debt), or in your savings and investment accounts. If you are big believer in delayed gratification, you most likely have a larger retirement fund than people who buy things at whim.

Three Types of Spenders

If we want to break things down further, we can take a deeper look at our spending habits. It’s possible to break things down into three general types of spenders. They are:

1. Minimalists – Less is more
2. Consumers – More is more
3. Investors – Spend to make more

Minimalists. If your primary expenditures are only items you need, such as food, clothing, shelter, and normal bills, then you may be a minimalist. There are a lot of great things about living a minimalist lifestyle, and it works for many people. But in it’s truest definition, a minimalist lifestyle doesn’t work for everyone. Abstinence and delayed gratification can be beneficial, but self-denial can be detrimental to your physical and emotional health. Trying to force yourself to do something that isn’t in line with your beliefs or lifestyle is a quick way to being unhappy.

Consumers. Do you think shopping is a sport? Do you go shopping for fun, or to lift your mood? Are you an early adopter of new technology and gadgets? Then you may be a consumer. Spending money in and of itself is not bad. It only becomes a problem when it interferes with your lifestyle or ability to meet your financial obligations or other commitments.

Investors. If you primarily spend money to make money*, then you are most likely an investor. (*excluding normal bills). This includes traditional investing, such as buying stocks, bonds, and other “traditional” investments. But it can also include investments such as rental properties, a small business, education, or anything else where you can receive some short or long term ROI.

We Are All a Little Bit of Each

It’s easy to jump to conclusions and say you are only one type of spender. But most of us are a combination of all of these, at least to some degree. And that is a good thing.

If you live your entire life as a minimalist, you may miss out on some of the things you or your family enjoys. Spending money is good, but not if it means you are living in debt or struggling to make ends meet. Investing is essential for your long term planning, but not at the expense of giving up your ability to enjoy a healthy or happy lifestyle in the present.

A Healthy Balance is the Key

Many people will tell you how you should spend your money – the most common example being that you should cut your spending to get ahead in life. But that is broad, and quite frankly, baseless advice. It’s all about setting and maintaining your priorities to achieve your financial goals. You should spend your money how you like – so long as you are in control and your financial habits aren’t hurting you. Money is only a tool. It can buy you things and it can give you security, but it doesn’t buy happiness.

Which type of spender are you?

Related Articles:

1. Why You Should Set Spending Priorities
2. Mastering the Art of Guilt Free Shopping
3. On Spending Consciously

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Whenever we hear about a new scam, or hear about how someone has fallen for a scam, we shake our heads and wonder how anyone could be so stupid. However, there are plenty of scams out there, and many of them are fairly sophisticated. And, of course, there are other factors at work, and these can cloud anyone’s judgment, no matter how smart you are.

Here are some of the reasons that people might fall for scams:

Really, Really Want to Get Rich Quick

Why do people fall for scams?

One of the biggest reasons people fall for scams is when they let a desire for money cloud their judgment. It doesn’t even have to to a case of greed clouding judgment. Sometimes you badly want the money to pay off debt, or you feel like the right “business opportunity” will help you improve your lifestyle. No matter the reason, though, the lure of quick money, or easy money, or a “system” that allows you set it and forget it, can cloud your judgment since you are so focused on getting the money and “fixing” your problems.

Of course, sometimes it really is greed. You think that it really is possible to earn lots of money without putting in the work, or having patience.

Want to Believe It’s True

There are a number of scams that are too good to be true. However, when we really want something to be true, we can make poor money decisions and be taken in by a scam. You might want to believe that it’s possible to fix your credit immediately, or that the guy showing up promising to re-do your roof in one day is totally honest. While not everyone is perpetrating a scam, you do need to be careful. As much as you would like to believe that you qualify for a surprisingly huge tax credit, it probably just isn’t true, and you need to be on your guard.

You Trust the Information Source

Finally, it can be possible to be taken in if you trust the information source. One of the ways that scammers dupe even the smartest is by posing as a legitimate company. The Better Business Bureau recently found that its good name was being used to get personal information from scammers. During tax time, there are a number scams related to refunds. You think you are receiving an email from the IRS telling you that your refund is being held up for some small reason, and you are asked to go to a site and enter personal information (the IRS won’t do this via email, though).

Another issue is that you might trust an “inside” tip from a friend or family member. You trust the source, and decide to throw in. And, while this trusted source may not be trying to scam you, he or she might be fellow-victims, and you could all end up in trouble together.

It’s important to be vigilant, and to be careful about the people you trust — especially with your money and personal information.

What other reasons are there that people fall for scams?

Photo credit: Alex E. Proimos

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Numbers can be powerful. And they can be fun. One thing I like to do is work backwards from an end goal. There are several benefits of doing this, one of which is to break things down into bite size bits so you can better understand how you can achieve your goals. It’s like looking at your destination on a map and tracing the route to back to your doorstep. Sometimes starting at the end is just easier.

How much does your debt cost you each day?

Do you know how much money you need to earn?

Let’s look at a powerful example of how working backwards can change your point of view about how you borrow and spend money. Gather all your debts, including your auto loans, student loans, mortgages, HELOC, credit card statements, etc. We are going to examine how much interest you pay each month on all of your loans. Take these statements, add up how much you pay each month, then subtract your principle from how much you paid the lender and you will see how much interest you are paying each month. Click through to see an example of this exercise. The results will surprise you.

This eye opening exercise shows you how detrimental debt is to your financial goals. If you want to take the example further, divide your monthly amount by 30 and you get a number for how much your debt costs you each day. Try it. It will further open your eyes to how expensive debt really is.

How much do you need to earn each day?

But it works the other way as well. You can break down these numbers for earning instead of spending. This is a more positive way to look at things because you are focusing on earning money, not spending money.

To determine how much you need to earn each day, start with your budget or total monthly expenses and divide by 30. You have a rough answer of how much you need to earn just to break even. Be sure to take into account irregular expenses or you are shorting yourself.

Reaching your financial goals, one day at a time

Now let’s take it a step further and apply this concept. Take a look at your financial goals. How can you reach them? Let’s look at a common example, such as maximizing an IRA. If you are under age 50, your max contribution is $5,000. To max out your IRA, all you need to do is save $416.66 per month, or roughly  $13.70 each day. When put into bite size bits, $13.70 doesn’t seem like a lot of money (and it’s certainly less than most of us are paying on interest payments every day!).

You can apply this concept to any financial goal, including maxing out your 401k, saving for a house, a new car, a vacation, etc.

Why break down by day?

Breaking things down to a daily goal makes it easier to make incremental changes. For example, let’s say you need to earn an extra $1,000 per month. Well, that is a lofty goal for most people. I can’t arbitrarily decide I want to earn another $1,000 next month and implement it overnight. But I can say I want to earn another $33 a day and find out a way to do that. Want another $100 a month? Just earn (or save) $3.33 a day and you are golden. Want another $10,000 a month, hey, just earn another $333.33 a day and you are in the money. Want another $100,000 a month? Yeah me too.

It’s all about economies of scale

The point here is to break down your goals into achievable milestones. It’s hard to come up with $100 or $1,000 overnight. But $3 here or $33 there is more attainable. Find a process and learn how to replicate it. Once you do, you can get to the point where you are not only reaching your goals, but setting more aggressive goals and finding a way to reach those.

Photo credit: chrisinplymouth

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I’ve spent the last few days working seemingly non-stop on my business. But most of it was the little things people don’t see – like cleaning up code and broken links on the back end of my sites, updating old content to reflect more up to date information, dealing with advertisers (fun things like reading contracts and chasing down companies who haven’t paid for advertising), updating my books, getting my tax documents together (still haven’t filed yet), and all kinds of goodies. All of it is essential, and yet most of it won’t been seen or noticed by the majority of people who visit my sites. But that’s OK – it comes with the territory.

Sometimes it feels like you are spinning your wheels - even when the work is important!

As I was going through the laundry list of tasks I had in front of me, I was reminded of how many essential tasks go unseen in our daily lives – that is, until they aren’t done. Like the joke about the man who comes home from work to see the house trashed, the kids running around screaming, the television blaring, a half-eaten pizza sitting on the table, etc. He goes upstairs to his bedroom and finds his wife in bed watching TV and eating a big bowl of ice cream. “What’s going on,” he asks. To which his wife replies, “You know how you come home from work every day and ask me what it is I do? Well, today I didn’t do it.”

What a testament to SAHMs everywhere!

Our finances share a distinct parallel to this. If you don’t balance your checkbook, you run the risk of an overdraft – which is crazy expensive and entirely avoidable. If you don’t pay your bills on time you will trash your credit score. If you don’t rebalance your portfolio, you run the risk of being overexposed when the market shifts, potentially causing you a lot of money, and delaying your retirement.

If you run a small business, the same things apply. You need to keep up with your daily tasks, and all of the little things no one sees, or really cares about. Taxes, payroll, accounting, legal documents, permits and licenses, and all the fun things that can get you into hot water if you don’t do them. They are a sunk cost in terms of money and time, but entirely necessary.

Home maintenance, car maintenance, preventive health, insurance, and all those little things. All those important things.

The more life become complicated, the more I understand the importance of simplifying things as much as possible. Lately I have been focusing on simplifying my finances by consolidating accounts, automating payments, opting for electronic bill pay, combining insurance policies under as few providers as possible, etc. The less time I spend managing my finances and other accounts, the better. That gives me more time for the important things like family, friends, church, and running my business.

The same thing goes for simplifying my business. I’ve been spending time creating scripts and processes so I don’t have to recreate the wheel each time I want to do something. Canned e-mails work great for frequent e-mail inquiries. An advertising rate chart handles most advertising inquiries. Creating checklists for repetitive, but important actions, ensures the little things are done correctly the first time, every time.

It’s important to keep up with the little things, even when they go unnoticed. Sometimes those are the most important things you can do.

Photo credit. Zebra Pares

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One of the best ways to ensure that you have a good safety net during retirement is to maximize when you take Social Security benefits. The decision about when to take Social Security benefits depends on your financial situation, though. How much money you receive is based on how long you have been working (and paying into the system), as well as when you decide to start taking benefits.

The longer you work, and the longer you wait to begin taking benefits, the higher your monthly payments will be. However, if you have lost your job, and can’t find a new one, Social Security benefits might be necessary to help keep you afloat.

When are You Eligible for Social Security Benefits?

First of all, you need to figure out when you are eligible for Social Security benefits. If you are disabled in some way, you can begin receiving Social Security benefits no matter your age. However, you will have to prove your disability. Your benefits will be considered disability benefits until you reach your full retirement age. At that point, your disability benefits are converted to retirement benefits.

If you aren’t disabled, the earliest age you can begin receiving Social Security benefits is age 62. However, it’s important that you understand that you won’t qualify for “full” benefits. If you start taking benefits before you reach what is considered the “full” retirement age, you end up with reduced benefits. Your full retirement age depends on when you were born. The Social Security Administration (SSA) offers a web site that can point you to your full retirement age. For people born after 1960, though, the retirement age is currently 67. You can find more information about how your benefits are reduced by consulting the benefits chart provided by the SSA.

You can also improve your monthly Social Security benefit by waiting longer to take your Social Security benefits. If you wait until you are beyond your full retirement age, you will receive an additional 8% for each year until you are 70. There is a double advantage to waiting as well, since if you keep working you can pay more into the system and increase your benefit that way. The higher your monthly benefit, the less you have to rely on your own next egg to cover your expenses.

Can You Take Social Security Benefits While Working?

It is possible to start receiving Social Security benefits while you are working. However, you might be subject to a cap. As you reach a certain amount of benefits while you have a job, you have to give back half of every dollar you receive in benefits — and this rule applies even after full retirement age. It is rarely worth it to start taking your Social Security benefits while you are working. However, if you have had your hours cut to part-time, and you are at least 62, you might need some benefits to help you through the wage reduction.

Also, remember that you can start taking money penalty-free from your tax-advantaged retirement account at age 59 1/2. That means that you might be able to supplement with those benefits until you reach full retirement age. Before you make a decision about drawing your Social Security benefits, consider your financial situation, and your cash flow. Only take Social Security benefits before your full retirement age if you have to.

Photo credit: DonkeyHotey

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