Recently, I happened to be leafing through Elizabeth Warren’s worthwhile personal finance book, All Your Worth, when I stumbled across an interesting statement on page 244: “If things get really tight and you don’t have enough to cover all your expenses, pay the most important bills first.”
Obviously, Warren intended this advice to be given to someone who’s really struggling to pay all of their bills - and it’s great advice for that situation. Make absolutely sure your essentials are covered - your home, your transportation to work, your food. Those are the things that you need and thus they take priority over everything else.
But my mind tends to work in the opposite direction sometimes. When I read that passage, my mind immediately moved to the least important bill.
Play along with me for a moment. What’s the least important bill you pay each month? It’s not that easy to answer right off the bat, so I encourage you to just make a list of all of your monthly bills. Your mortgage or rent. Your car payment. Credit card bills. Phone service. Food. Electricity. Internet service. Netflix. Maybe even your World of Warcraft bill.
Got that list? Now, cross off the ones that cover your life’s necessities, such as your mortgage, your food, your electric bill, and your car payment. Next, cross off the bills that, if left unpaid, will detrimentally affect your other bills, such as your credit cards and other debts.
What you’re left with are your nonessentials, things like your cell phone, your Netflix subscription, your cable subscription, and other such things. Now, rank them. Which is the most important to you? What’s the next one?
Eventually, you’ll be down to one bill - your least important bill. And now comes the soul searching. Do you really use whatever that bill pays for? Does that service really provide any value for your life? Could you not easily replace that bill by regularly visiting the library or getting a digital converter box or finding a non-subscription game to play?
Then think about this fact. If you cancel a $20 monthly bill and instead apply that $20 to your credit card bill (that has a balance of $5,000, a 12% interest rate, and a $100 minimum payment), you’d turn 302 payments of $100 a pop into 55 payments of $120 a pop (I used the minimum payment calculator to get this number). Your credit card balance would disappear in about four and a half years instead of twenty five years, just by getting rid of that Netflix account.
What about my least important bill? My least important monthly bill is easily my emusic account. In the past, I’d already eliminated my Netflix subscription, my World of Warcraft subscription, and downgraded both my cable bill and our cell phone bill. Even though I get a lot of enjoyment from emusic, I think of it this way: if I take the value of my emusic subscription and apply it to my remaining student loan, I’d shave several months off of the repayment period, bringing debt freedom that much closer.
I’ve already saved $50 a month shaving away some of my “least important” bills - applying that savings to overpayments on my wife’s student loan (along with a healthy dose of our debt snowball) eliminated my wife’s student loan almost six months earlier than planned (and years before it was finally due).
Will I eliminate emusic? I haven’t decided yet whether I’ll downgrade or eliminate it. I listen to music roughly nine hours per weekday as I always have music playing in the background - and almost all of it comes straight from emusic. In other words, after cutting away some of the fatty monthly bills, I’ve reached the point where I’m starting to get close to the meat of the matter.
But without that consideration, I’d still be paying a student loan bill that’s now paid off. And I’d be paying it for quite a while yet.
Spend some time thinking about your least important bill. Is it actually important enough to hinder your debt repayment plans or your investing goals?
The Simple Dollar chronicles a man's road to recovery from "total financial meltdown." As author Trent Hamm puts it, "The Simple Dollar is a blog for those of us who need both cents and sense: people fighting debt and bad spending habits while building a financially secure future and still affording a latte or two." We'll post a couple of entries a week, but you can check out his writing daily at www.thesimpledollar.com