How to Prioritize Debt

When money gets tight and there isn't enough to go around, people sometimes begin to panic when it comes to prioritizing outstanding debts.

A growing number of people are keeping up on their credit card bills while they stop payments on their home mortgage. Their thinking seems to be that credit-card debt is easier to handle. Unfortunately, this is a terrible personal finance move.

It's vitally important to know which expenses to pay first when you are short on money. You need to know which debt payments will benefit you the most, so that you can limit the financial damage as much as possible.

High-Priority Items

While you will need to take a hard look at the specifics of your particular situation, here are some basic guidelines for determining which debts should have the highest priority when resources are tight:

Survival necessities: First and foremost, make sure that you have enough money for food and basic clothing to survive. This also includes any medication you may need for illnesses and payment for medical service if prepayment is required (this does not include old medical bills). While there are charities that help with these costs, make sure that you have enough money for anything they may not cover.

Housing: Whether you have a home mortgage or are paying rent, keeping your housing payment up-to-date is essential so you have a place to live. If your finances get so tight that you are unable to pay your mortgage or rent and know you're in danger of losing your home, don't use your money to pay off other bills. Many people do, but this usually isn't a good financial strategy. If you lose your current home, you'll have to move and find a new place to live. You will need money to do this. It's therefore better to keep money aside until you find a new, more affordable place before you use the money meant for your mortgage to pay off other bills.