How to Prioritize Bills When You're Low on Cash

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.

Analyze everything. If you have a due date every other day, or so it seems, and nowhere near the money to cover the bills, that's when you really have to study every angle. For instance, Kelley Long, a Chicago-based money coach and member of the National CPA Financial Literacy Commission, points out that if you're really strapped for cash, you can probably get away with not paying your rent for a little while.

"While your landlord might threaten you with eviction after being three days late, the process takes some time, so if you will be able to pay rent, say, with your next paycheck, then pay your utilities first," Long says.

Not that she thinks it's a good practice to pay rent late -- it's just if all your choices are bad ones, you might be able to deal with the stress of not paying your rent for a month more than not having electricity or running water.

It's important to constantly analyze your bills, so you don't have to pay bills late. Hoebbel says he keeps track of his bills and income coming and going on an Excel spreadsheet. "Because we're self-employed, we don't have many regular paychecks, so we have to project when and how much we will be paid by various clients, so we can plan when to pay our expenses," he says.

Ask for help. If things are really bad and you just can't pay someone on time, call and work out an arrangement that will create breathing room. For instance, Hoebbel says he and his wife have one with the electric utility. "We're on the final month of paying so that we will be caught up in December," he says.

You may be pleasantly surprised with the help you can get, Love says. He had a client who declared bankruptcy and was financing a car at an 18 percent interest rate. He convinced the woman to approach a local credit union, where she was able to get a new loan for 9 percent. But it should be noted that the credit union knows her CPA. At this point, her bankruptcy was three years in the rearview mirror. It isn't as if everyone in a financial mess can refinance their car or house and get lower payments. Yet if you haven't tried to refinance, and especially if you have good credit or at least a few years of on-time payments, you may have a better shot at refinancing than you think.

Pay something rather than everything. So your plumber took a check, and unfortunately, it bounced. You can't pay him the entire $400. Or your health insurance won't pay for those X-rays, so now you owe the hospital $200. If you're having trouble mustering up the nerve to call and ask for help with your payments, send a partial payment, knowing you'll send more when you can.

"Paying something instead of nothing is better," Love says.

You still may get grief from your creditor, but you'll probably get less grief. It's worth trying. In fact, the best strategy for almost any consumer struggling to get control of the bills isn't to rely on one strategy but to try just about all of them.