A couple of days ago I was asked by two different people about debt consolidation loans. I will state up front that I have used a debt consolidation loan in the past. The process of getting the loan was easy (because my credit was good), it was very organized (because the business has been around for quite a while), and I immediately felt a lot better about my financial situation (because I didn’t know any better).
I am sure there are people out there that have gone through debt consolidation loans and everything worked out very well. I would say that if that is you, then you are the exception not the rule. For most people everything that is wrong with debt consolidation begins a month or so after you complete the deal.
First, let’s look at why debt consolidation loans are so attractive. All of these benefits are offered in a general sense. There may be some outliers, but for the most part, the following list is what is promised and what draws people into the debt consolidation trap.
- you will have single loan rate that is lower than the average of the debts you are consolidating
- you will have a single payment that is lower than the sum of the payments you are consolidating
- you will be working with a single creditor – often a bank – instead of credit card companies
- you will have extra money each month, to do those things that make you happy
After reading that list again, I can really understand why so many people use the debt consolidation as a means of managing their financial picture. However, the problem isn’t what is on the list, the problem is what is left off of the above list. The problem is what gets people into trouble in the first place – overspending.
People that need debt consolidation loans are people that have more debt than they can (reasonably) pay back. They have either dealt with an emergency situation that caused them to borrow money (because they didn’t have an emergency fund) or they simply have been living a lifestyle that exceeds their paycheck. Either way, the one thing that gets most people in trouble with debt consolidation is lack of discipline.
Not having creditors calling anymore, not having to worry about which bill to pay, and the feeling that you are finally on the right track to getting things under control is all an illusion. Unless you have dealt with the overspending that caused you to need the debt consolidation loan in the first place, it is very likely that you will continue with the same lifestyle. That lifestyle will in just a few short months look like three credit cards with a monthly balance and you wondering what just happened.
So what should you do? Run! Run away from the idea that a debt consolidation loan is a wise decision. Run away from the lifestyle that is out of control with spending. Run away from the friends that aren’t looking out for your best interest…and while you are running, look for someone that will hold you accountable for your decisions. The best alternative to a debt consolidation loan is a budget and if necessary a second (temporary/part-time) job.
Financial freedom is possible, without debt consolidation. Either way it will take time, but the first step must begin with a decision to start living on a budget that is designed around your actual take-home pay. Don’t think that borrowing money is the way to get out of debt. That is the plan the government is on right now, and look how that is working out for your tax bill.
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There are four rules of cash flow that YNAB is based on. We covered Rule #1 which states that you should live this month on last months income. If you are wondering if all the rules are going to be this tough, the answer is no. After Rule #1, things get a lot easier. So let talk about Rule #2.
Once you have saved enough money to equal last months income, you are ready to start spending that money. The most common cause of overspending from month to month, is not having a plan on where your money is going. We have already talked about how the budget is the foundation of your financial plan. The question is, ‘how do you set up a budget?’ Actually, the answer to that question is very easy, and it is the basis for the next rule.
YNAB Rule #2 says that you should Give Every Dollar a Job. That means that when you look at last months income, you are going to spend each and every dollar before the month begins. Assigning your money a job is the same as you going to work each day. With your assignment in hand, you are more likely to be successful. With no plan, you are preparing to fail. The Bible speaks of this principle in the Book of Proverbs.
Go to the ant, you sluggard! Consider her ways and be wise, 7 Which, having no captain, Overseer or ruler, 8 Provides her supplies in the summer, And gathers her food in the harvest. Proverbs 6:6-8
We are reminded to observe the ant and model her desire to work towards a goal. Each month the goal is to allocate your money in a way that will provide the best use of your income. Start with the important things like giving, food, housing, transportation, etc. Once you have determined that all of your monthly expenses are covered move on to other aspects of your budget like paying off debt and savings.
The most important aspect of Rule #2 is not leaving any money without a job. If you do, it is a pretty good bet that you will simply waste that money. If you are married, hopefully both you and your spouse are working on this new plan and you are agreeing on where your money is going.
There are a lot of ways to manage your budget, and obviously we recommend using whatever method works for you. However, if you are looking for a tool guaranteed to make budgeting simpler then we recommend YNAB. If you are still not sure but would like to learn more about what YNAB can do, then sign up for the YNAB online course, and get to work.
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Before we began living on a budget, we often found ourselves not able to afford certain things. We were constantly telling each other, “We can’t afford that”. It usually wasn’t anything overly extravagant, just normal items that today we can buy anytime we like.
By managing our resources we have found that we no longer have to say, “we can’t afford that”. However, what we have found is that quite often we don’t want to buy a lot of those items anymore. There are still times when we find things that don’t fit into our budget, but instead of saying “we can’t afford that”, we now say, “we have decided to spend our money on more important things”.
By putting the focus on what we have decided to do (instead of what we can’t do), we keep a positive attitude with regard to our finances. If there is something that we really want (like a cruise next January), we simply decide on how much we need to save to make it happen.
A positive attitude is extremely important when things begin to slow down or the light at the end of the tunnel seems to be getting dimmer. Anyone that tells you living financially free is easy hasn’t ever had to struggle to make ends meet. The ideas we talk about on this site are simple, but implementation of those ideas is anything but easy. The next time you find yourself wondering if it is worth it, just remind yourself that you have decided to be in control of your future. Remind yourself that you have decided to no longer make poor decisions based on emotion. Remind yourself that just because it doesn’t fit into today’s budget, doesn’t mean you can’t afford it. It simply means that you have decided to spend your money on more important things.
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