Paying every bill on time and in full is a great idea, but it’s not usually a workable option when you are having cash flow problems.

Most bills are paid using cash flow, which is the money that comes from your paychecks.

In contrast, cash savings is money in a savings account or money that is given to you as a gift from family or money that you get from a tax refund. The point is that it is a limited supply of cash.

When you have an income change as a result of a divorce, job change and a health change, then it may be tough to stay current on bills.

Around tax refund season, I am frequently asked by clients if they should use their tax refund to stay current on their credit card bills.

When you are having money troubles, you want to make sure that you are paying credit card bills using your cash flow (paychecks) rather than your cash savings (tax refund). The cash savings is like water in a cup – once you use it all up, it is gone. After that, how are you going to stay current?

More importantly, you may need that cash savings for necessities rather than using it to pay credit cards “just to save your credit.”

Case Study: I had a couple that came in for a consultation and they were current on their bills, but they had just received notice that the husband’s income was to be reduced as a result of across-the-board cuts in his oil industry job. He was also notified that his job would move to a different city in 6 months. They had $3,000 in cash savings, and they wanted to know if that should use it to pay bills “just to save their credit.”

I asked them to perform a gut-check: If you can’t see yourself going all the way down a certain road, then why take even one step in that direction?

Here are the questions that I had for them:
They had to pay for their move to the other city where the husband’s job was going to be located, so I asked them how they would pay for the move if they used that $3,000 to pay off some credit card bills?

I also asked them if they had estimated what their new household income would be after the pay cut. Would they need any of that cash savings to cover basic necessities.

They could break even if they sold one car, so I asked them if they could actually see themselves selling that car. Then they could use the savings to buy a car with cash (and no car payments) just so they could make ends meet at the new income and expense level.

The couple in this case study had no clear idea on the answers to my questions. As a result, they felt uneasy about using their cash savings “just to save their credit.”

Perhaps you can identify with their stress.

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