How to Prioritize Bills When You're Low on Cash

By Geoff Williams

If you owe more in bills than you have, it can be hard to know what to pay first. In fact, there is no right answer. The sad truth is that the worse your financial situation becomes, the more the standard rules of bill paying don't apply.

Pay yourself first? It's logical, often-dispensed advice to put money into savings and retirement before paying your other bills. But it isn't practical when your electric company is threatening to turn off your lights, your credit card payment is due in three days and your mortgage payment is two weeks late. You may have to dump all the advice you've heard over the years and simply go with your gut.

Tom Hoebbel, a photographer in Brooktondale, New York, opts for this strategy. "My wife and I are both self-employed and artists, a double-whammy," says Hoebbel, who has his own studio, Thomas Hoebbel Photography. "We survived the economic downturn, but the recovery, which has lifted large businesses and Wall Street, has left many of the self-employed behind."

The monthly bills in the Hoebbel household get paid eventually, but it hasn't been easy. "We do make sure there is enough food in the house, but energy shut-off notices and foreclosure threats are a regular experience," Hoebbel says.

So if you could use some help prioritizing bills, here are some strategies you may want to employ. Obviously, when you owe a lot more than you have coming in, there is no one-size-fits-all solution.

Pay Essentials First

Most personal finance experts will advise you to pay for your basic needs first. "Food, shelter, utilities," says Joseph Cunningham, assistant professor of accounting at Albright College in Reading, Pennsylvania. After that, make your car payment. Then make those insurance payments and make your credit card or student loan payment.

"The expenses I would choose to put off would be those items that are not collected quickly," Cunningham says, noting that the telephone, electric and water bills can often be paid after a due date. "These are heavily regulated. Those companies need to give you advanced notice of termination for nonpayment."

But do this long enough, and your cellphone may be turned off, and that may suddenly feel more important than your mortgage. In this case, you may have to jettison the essentials approach for something else, like this next strategy.

Pay First What Will Be Shut Off First

If you're paying off whatever you're about to lose, even if this strategy has become commonplace, you're in "emergency mode," says Jerry Love, a certified public accountant with his own firm in Abilene, Texas, who works with both the very wealthy and middle class.

He says he has had clients who have been in dire financial straits. When you're in emergency mode, he says, you should make a detailed list of what bills you need to pay, along with the consequences of not paying on time.

"Write down what bad thing will happen if you don't pay it," Love says. "We will lose the mortgage or be kicked out of the apartment, the electric will be shut off – and you number those items one through 42 or whatever." And then you pay accordingly.

Honesty Is the Best Policy

For the bills you simply won't be able to pay for a while -- a long while -- Love suggests calling your creditor. "Just call and admit it," he advises. "Say, 'Hey, I've got a problem, and I want to let you know that I'm not ignoring you. I just don't have any money.' "

Love adds that this may not work so well if you're calling a large creditor like a national bank that issued your credit card, but smaller businesses will probably work with you or hound you a little less.