It happens to everyone: a monetary emergency happens, such as a car breakdown, draining your bank account. Bills are still coming in, and you already know that you will not even be close to paying off everything this month.
One of the goals of strong personal finance is trying to avoid these scenarios by having a savings cushion, but this is not always possible. How can you get out of this situation with the least pain?
Example Scenario
For the examples in this article, we will assume that you have $1000 left in your checking account (and you already have enough groceries), with no paycheck coming until next month. You just received all of your bills by mail and email today:
| Bill Amount | Late Fee | Late Interest (Monthly) | |
| Rent | $600.00 | $50.00 | 10% |
| Electricity/Gas | $80.00 | $10.00 | 5% |
| Internet | $80.00 | $10.00 | 5% |
| Cell Phone | $50.00 | $10.00 | 5% |
| Credit Card | $80.00 | $20.00 | 25% |
| Student Loan | $260.00 | $40.00 | 0% |
| Car Loan | $200.00 | $20.00 | 0% |
| Car Insurance | $30.00 | $5.00 | 0% |
| Health Insurance | $250.00 | $20.00 | 0% |
The total amount is $1630 – way above what you can afford. To pull yourself up, you will need a plan of action.
Evaluate the Damage
The first step is to take a look at what will happen for each of these bills if they are not paid. This is a good way to prioritize which bills to tackle first.
- If your rent is unpaid for one month, you will get the late fee, but not likely evicted.
- Utilities usually cannot be turned off unless there are several months in a row of failed payments.
- Your internet connection probably will take a month or two of failed payments before your ISP shuts it off.
- If your cell phone bill is unpaid, your provider most likely will shut it down within a few days.
- Missing a credit card payment will not automatically put you in default, but it has a high interest rate and late fee. Plus this can really hurt your credit. The same goes for your car loan.
- Missing your student loan payment can put you in default fairly quickly – this is the stickiest kind of debt (not even bankruptcy will remove it).
- Missing a payment on your car insurance might void your policy. If you lose your insurance, you can no longer legally drive to work.
- Missing your health insurance payments might also void your policy (although there are some protections against this), and getting back on the plan might be expensive.
Now we can make a “ranking” of how important it is to keep each one of your creditors happy in the short term:
- Health insurance
- Cell phone
- Car Insurance
- Credit card
- Car loan
- Student loan
- Rent
- Electricity/Gas
- Internet
This priority will shift a lot if you are facing multiple months of being behind on your bills. For example, if you are under direct threat of eviction, rent might jump near the top of the list.
Explore Your Options
Next, spend a few minutes to think about any other ways you can scrounge up enough cash to make all your payments in one go. We discuss this in detail in our article on Short Term Financing.
Borrow from Friends or Family
Friends or Family might be able to help bridge the gap. This is usually the cheapest and easiest way to go, but many people are uncomfortable or unable to borrow money from the people they know.
Credit Card Financing
One option is to pay off your credit card first, then us the balance to pay off all your other debts, and pay off the credit card balance with your next paycheck. This is the second fastest and easiest method. This will keep all of your creditors happy, and you will not accumulate much interest before your next paycheck.
Short-Term Unsecured Loans
This is the type of loan you can ask for at a bank. Whether it is granted depends on your credit history, the amount you need to borrow, and the policies of the bank itself. If your bank offers it, this is another workable solution. This is NOT a payday loan. See our article on Short Term Financing to tell the difference.
Divide Your Paycheck
In the real world, this is the most common course of action if the first 3 options fail. Some of the bills are completely non-negotiable and will cause major problems if there is a lapse, like the health insurance, cell phone, and car insurance. For all the others, divide up your paycheck proportionally and hope your creditors do not complain too much until next month.
Pay Off What You Can
This also happens in the real world, but is more rare. In this case, instead of dividing up your paycheck proportionally, you pay off several of the bills in full, leaving others to be completely unpaid until next month. The creditors you do not pay off hate this – you will get angry calls or letters, and it might seriously hurt your credit.
Take Action
If you can borrow some cash, use your credit card, or get a line of credit from your bank, that will be the way to go. If not, you will need to determine which hurts less: dividing your paycheck, or paying off what you can.
Step 1: Subtract the Non-Negotiables
The top 3 things on our list are non-negotiable – any lapse in the bills will discontinue the service entirely.
Non-Negotiable Bills = Health Insurance + Car Insurance + Cell Phone
= 250 + 30 + 50
= $330
We know that no matter what, we need to spend this $330, leaving us with $670 in cash for the other bills.
Step 2: Calculate Cost of Each Bill If Unpaid
We want to decide if we are diving our $670 proportionally, or paying off a couple bills entirely. To see which is best, we first need to know how much each of the remaining bills will cost us if it waits until the next paycheck.
| Bill Amount | Late Fee | Late Interest (Monthly) | Bill With Late Fee | Interest Charge | Total In 30 Days | |
| Rent | $600.00 | $50.00 | 10% | $650.00 | $65.00 | $715.00 |
| Electricity/Gas | $80.00 | $10.00 | 5% | $90.00 | $4.50 | $94.50 |
| Internet | $80.00 | $10.00 | 5% | $90.00 | $4.50 | $94.50 |
| Credit Card | $80.00 | $20.00 | 25% | $100.00 | $25.00 | $125.00 |
| Student Loan | $260.00 | $40.00 | 0% | $300.00 | $- | $300.00 |
| Car Loan | $200.00 | $20.00 | 0% | $220.00 | $- | $220.00 |
$1,300 in bills today will grow to $1,549 next month if unpaid, or $249 more than it would be if we could pay everything today. We can see the biggest hits are coming from Rent and Credit cards.
We are not getting a monetary cost immediately from the Student Loans and Car Loans, but missing a payment will severely damage our credit history, and will accumulate more interest on the principle balance. We will estimate that the damage to our credit history will be worth $60 each for missing the Credit Card, Student Loan, or Car Loan payments.
There is also a chance our landlord and utility companies might report the missed payment – we will assume that it is about 1/6 chance, so we will put a “Credit Damage” amount of $10 for each.
This means the total damage done by missing every payment this month is:
| Late Fee | Interest Charge | Credit Damage | Total Cost | |
| Rent | $50.00 | $65.00 | $10.00 | $75.00 |
| Electricity/Gas | $10.00 | $4.50 | $10.00 | $14.50 |
| Internet | $10.00 | $4.50 | $10.00 | $14.50 |
| Credit Card | $20.00 | $25.00 | $60.00 | $85.00 |
| Student Loan | $40.00 | $- | $60.00 | $60.00 |
| Car Loan | $20.00 | $- | $60.00 | $60.00 |
| Total | $150.00 | $99.00 | $210.00 | $459.00 |
Step 3: Calculate Cost if Paycheck Is Divided
Next, we want to see what our cost will be if we divide our paycheck proportionally. This means we are not paying any bill in full, so we are still getting the late payment, and some interest charged. However, we will assume that there will be 1/4 the amount of damage to our credit for a partial payment than if we made no payment at all.
| Bill Amount | Percent of Total | Amount We Pay | Amount Unpaid | Late Fee | Total Unpaid | |
| Rent | $600.00 | 46.2% | $309.23 | $290.77 | $50.00 | $340.77 |
| Electricity/Gas | $80.00 | 6.2% | $41.23 | $38.77 | $10.00 | $48.77 |
| Internet | $80.00 | 6.2% | $41.23 | $38.77 | $10.00 | $48.77 |
| Credit Card | $80.00 | 6.2% | $41.23 | $38.77 | $20.00 | $58.77 |
| Student Loan | $260.00 | 20.0% | $134.00 | $126.00 | $40.00 | $166.00 |
| Car Loan | $200.00 | 15.4% | $103.08 | $96.92 | $20.00 | $116.92 |
We are paying $150 in late fees alone. Now we factor in the interest charges and damage to our credit that goes with this payment:
| Total Unpaid | Late Interest (Monthly) | Interest Charge | Credit Damage | Total Due Next Month | |
| Rent | $340.77 | 10% | $34.08 | $2.50 | $377.35 |
| Electricity/Gas | $48.77 | 5% | $2.44 | $2.50 | $53.71 |
| Internet | $48.77 | 5% | $2.44 | $2.50 | $53.71 |
| Credit Card | $58.77 | 25% | $14.69 | $15.00 | $88.46 |
| Student Loan | $166.00 | 0% | $- | $15.00 | $181.00 |
| Car Loan | $116.92 | 0% | $- | $15.00 | $131.92 |
| Totals | $780.00 | $53.65 | $52.50 | $886.15 |
To calculate how much this is costing us, we can add together our total late fees, total interest charge, and total damage to our credit:
Total Cost = Late Fees + Interest Charges + Credit Damage
= $150 + $53.65 + $52.50
=$256.15
The total damage is $256.15, which is just $202.85 better than paying nothing at all, but still a big amount.
Step 4: Compare with Paying Off Big Credit Debts First
What if, instead of dividing up our paycheck equally, we just pay off what we can afford, and leave the rest? To prioritize, we can take our list of priorities and simply pay them off, working our way down.
| Amount | Remaining Cash | |
| 1. Credit card | $80.00 | $590.00 |
| 2. Car loan | $200.00 | $390.00 |
| 3. Student loan | $260.00 | $130.00 |
| 4. Rent | $600.00 | Can’t pay – skip |
| 5. Electricity/Gas | $80.00 | $50.00 |
| 6. Internet | $80.00 | Can’t pay – skip |
Now we have one very unhappy landlord and ISP, but our other bills are paid. We can now compare this to how much damage skipping these bills entirely will do:
| Bill Amount | Late Fee | Late Interest (Monthly) | Interest Charge | Credit Damage | Total Damage | |
| Rent | $600.00 | $50.00 | 10% | $65.00 | $10.00 | $125.00 |
| Internet | $80.00 | $10.00 | 5% | $4.50 | $10.00 | $24.50 |
This gives us a total damage of $149.00, saving over $100 compared to dividing up our paycheck equally. We even still have $50 in our pocket – applying this to the Internet or Rent bill would remove some of the credit damage and interest charge, saving even more money.
In every case, you will save a lot of money by paying off many bills with credit charges than trying to divide up your paycheck equally. The reason most people still divide up their paycheck when faced with a cash shortage is human: every creditor will send you emails and calls as soon as your payment is late demanding payment as soon as possible, so people try to minimize the damage from each creditor, instead of focusing on minimizing the damage from every creditor. By keeping the big picture in mind, you will do your spending plan a huge favor!
You can download a spreadsheet showing all of these calculations, and even change the values to match your own bills, by clicking here.