Most people inevitably hit tough times at some point in their life. The catalyst might be different, but the premise is the same; difficulty paying bills and covering expenses.
Prior to the current economic landscape, nearly half of Canadians were $200 away from insolvency. We suspect this recent pandemic has only made things much worse with mass layoffs, business owners closing up shop, and corporations taking serious hits to their revenue. The amount of people in tough times is likely to increase exponentially.
So when the going gets really tough, and money is hard to come by, what expenses and bills are a priority? What are the first things you should stop paying for?
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When the Going Gets Tough
A tough time is quite subjective. When a billionaire only has $100,000 in his account that might be a tough time for them. For a lot of people, $100,000 in their account would be more than several years’ salary.
We want to look at the situation where people are in dire straights. Where you may have lost your job, depleted most of your savings, have a large unexpected expense, and have to start weighing which bills you pay because there isn’t enough cash to pay them all.
Some of the most common expenses that the majority of people have are:
- Credit Card,
- Other Debt,
- Phone(s) and subscription services, and
High Priority Bills to Pay
- Utilities, and
When things get tough and you have to start making decisions on what to pay, there are some general principals. The most important thing is to make sure you and your family have the necessities to stay alive. No not Netflix. This means a roof over your head, and food in your belly.
That means that the bills that should be paid first are your mortgage/rent, insurance for your house, utilities (water and electricity), and food. During the most dire times, your diet may need adjustments as well. Rather than organic food, fresh fruit/veggies, fresh-cut steaks, etc., you may have to settle for cheaper alternatives; frozen vegetables, pasta, canned fruit, etc.
When a crisis happens, we often do not have a clear understanding of how long it will last. For this reason, it’s important to make sure you can sustain your lifestyle for a long period of time.
Today’s landscape is slightly different. A lot of lenders have paused mortgage payments. Furthermore, landlords have been told not to evict tenants during the pandemic. However, at some point, those missed payments will have to be made up, and those terms will have to be negotiated with the lender. If paying your housing costs at this time is doable, we highly suggest it. This will hopefully mitigate some stress once this pandemic blows over.
Medium Priority Bills to Pay
- Vehicle, and
Although phones, vehicles, and the internet are not essential to life, they do make modern life a lot easier. If after paying your high priority expenses there is still money remaining, you will have to decide which of these is most important.
Having a phone is relatively important. Without it, it is very hard to stay in contact with people. However, if you need a phone, you should consider lowering your plan. That $20 could be the difference between a couple meals and going hungry.
If you are lucky enough to continue working during a personal tough time or during the current pandemic, a vehicle might be necessary. Without a vehicle maintaining employment for some can be next to impossible, especially in rural areas. If paying for a vehicle means the difference between having a job and not, it is probably in your best interest to continue paying for it. However, multiple family vehicles are probably not a necessity.
It seems as though today’s world is intertwined with the internet. Although it may make life a lot more convenient, it too is not a necessity in most cases. If you can go without it, cancel it when finances are really tight. When things go back to smooth sailing, you can always get it back.
Although the internet, much like a phone, make a lot of things like job prospecting more convenient, there are ways around it. Particularly with the internet, there is a lot of public places where it is obtainable.
Low Priority Bills to Pay
- Extra phones,
- Subscription services, and
- Credit cards and other unsecured debt.
When times get really tough some bills will have to go unpaid or more things will be canceled. One thing that definitely is not necessary is everyone in the family having a phone. This is especially true in times where people are stuck at home, and a lot of businesses are closed.
Another such thing that isn’t necessary is subscription services. Your schedule might be completely open now with no work so it might seem like a great time to catch up on TV shows. However, the cost of subscription services can add up quickly. Subscription services that are forgotten about can drain up to $1,100 per year. That’s quite a substantial amount when you’re pinching pennies.
Although we would normally never suggest anyone skip their debt payments, especially on credit cards, where it seems like the cost to carry is your firstborn child, there is always an exception to the rule.
When things are really bad and you don’t know where your next meal is coming from, prioritizing your debt payments is extremely important. Ensure your debt payments are made on loans where you have pledged collateral first (your home mortgage, or your car loan). If you miss these payments, lenders do have a right to seize your property and you risk losing the equity you have built.
If you are forced into a position where you must skip debt payments, skip those debt payments that are not secured by any of your personal property. This is most commonly your credit cards and lines of credit. While you will take a hit to your credit score, it is better than going hungry and better than losing equity you’ve built in your home or vehicle.
If you have gotten to the point financially where meals are uncertain, there is a good chance your credit score has already taken a hit. So if that’s the case, if making your credit card payment means you won’t have food on the table, it is not hard to see what choice should be made.
We are in an unprecedented time that can easily be compared to 1929. Unemployment is increasing, debt is higher than ever, and wages are stagnant. This could very easily lead to a lot of people to be in an uncomfortable financial position.
If you’re lucky enough to continue working, do not take it for granted. Make sure you are building up your emergency fund because you never know when you might fall on hard times.
If you have found yourself if a tough spot financially, make sure you’re prioritizing your expenses early on. You never know how long tough times last and it’s prudent to be prepared for the long term.
If you have any questions about your situation reach out to us! We’d love to get to know you and we’d be happy to help.
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Disclaimer: This Forbes Wealth Blog is for informational purposes only and does not constitute financial, legal, or tax advice of any kind. Please consult your legal, accounting, tax, investment, banking, and life insurance professionals to get precise advice relating to your particular situation before acting upon any strategy