How to Make Sure This Is Your Last Debt Consolidation

If debt is a headache for you, debt consolidation can be more effective than Advil. You simply pay down all your existing liabilities by rolling them up into one bigger loan. That's means you have to manage just a single payment each month, and – especially if you have high credit card balances – you're likely to be paying a much lower interest rate and to have to find substantially less money for total debt outgoings each month. Anyone with reasonable credit can apply for a personal loan that can facilitate that, and homeowners can borrow at exceptionally low rates by rolling up their debts into a home equity loan or home equity line of credit (HELOC). They could also choose a cash-out refinancing, which should normally have an even lower interest rate.

Debt consolidation is generally simple, and it can reduce your stress levels and increase your disposable income each month, making life feel a whole lot better. But before you go ahead and apply for your loan or line of credit, ask yourself these three questions:

  1. How did I get myself into this debt mess?
  2. Does the fact I'm in it mean I have an unsustainable lifestyle?
  3. Will I be back facing exactly the same debt problems in a few years?

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You may have experienced some one-time setback in your life that means you can honestly answer those last two questions in the negative: you don't usually have an unsustainable lifestyle and you won't be back in the same mess a few years down the road. But for probably most people who need debt consolidation, the answers are positive: your total outgoings routinely exceed your total income, meaning your indebtedness is inevitably going to grow. And that's a problem.

By all means carry on and get your personal loan, home equity product or refinance. But at the same time, create a plan to make adjustments to your income and spending that will mean this is the last debt consolidation you're ever going to need.

Budgeting vs. Botulism

Ask many people whether they'd prefer to maintain a household budget or suffer a non-fatal bout of botulism, and a surprising number would weigh their options before replying. Budgeting, some seem to believe, is for nerds, penny-pinchers and boring types. But plenty of others budget because they like to feel in control of their finances – or because they once recognized that they urgently needed to seize that control.

There's no point in kidding you that building and maintaining a budget is fun; there's too high a chance of your knowing someone who does it for a company, department or branch, and who knows it can be a bit of a chore. But ask yourself why enterprises and organizations are so keen on budgeting: It's because the process is a reality check on the sustainability of their activities, and allows problems to be identified and addressed before they become serious. If that's good enough for managers, don't you think you owe it to yourself and your family to put in place the same protections for your household?

It's fine for you to find a method of household budgeting that works for you. Maybe you want to take a paper-based approach or perhaps you'd prefer to use a laptop or some other device. A quick Internet search should reveal where you can download free or paid-for applications and apps or Excel spreadsheet templates that can simplify the process.

Some Guidelines

Different financial advisers suggest different approaches to taking control of your money. One financial planner recently suggested in The New York Times that you should simply improve your mindfulness by telling yourself every time you make a purchase, "Isn't that interesting?"

But most recommend drawing up a proper budget that seeks to match your income with your outgoings and savings goals. Here are 10 ideas that might help:

  1. For at least a few months, record every cent you spend, either in a notebook or using a smartphone app. Then transfer the sums into your ledger, spreadsheet or specialist budgeting application. You can't manage your money until you can see where it's going.
  2. Be sure to include all your income from all sources in the plus section. And, if you can boost your income, that may be less painful than cutting back on your expenses.
  3. Divide your outgoings into fixed, unavoidable monthly expenses, such as mortgage/rent, car payments, property and other taxes, insurance, debt payments and so on. What's left is your discretionary spending, over which you have more immediate control.
  4. Recognize that some types of discretionary spending are more discretionary than others. You may be able to cut down a bit on your utility bills and gas costs, but you probably can't eliminate them.
  5. Each month, forecast how much you're going to spend in each major category in the next month. Challenge yourself to reduce your outgoings where possible, but be realistic.
  6. At the end of each month, drop into your spreadsheet your actual spending in each category next to its budget figure. You'll easily spot differences and potential problems.
  7. Don't beat yourself up if you occasionally go over your monthly budget. Everyone does. But worry if you're busting it frequently.
  8. When looking for savings, focus on the spending over which you really do make choices: dining out, visits to coffee shops, cable subscriptions, vacations, gifts, avoidable travel, magazines and newspapers, purchases of goods you want rather than need, and so on.
  9. If, regardless of what savings you make, the sums almost never seem to add up, and you're going over budget regularly, you may have to ask yourself some tough questions: Should you move to a more affordable home or buy a less prestigious car?
  10. Suppose things have gotten so bad that nothing you can do will be enough. Don't panic. Consult a debt counselor. The Federal Trade Commission's website has advice on how to find a trustworthy one.

The Limits of Consolidation

Debt consolidation can make life a lot better. But its benefits can be short-lived. It's a bit like getting in a professional crew to spring clean your home: the improvements will be real and valuable, but without continuing effort on your part, they'll gradually fade away as you carry on living your life.

Of course, you can consolidate your debt more than once. But you can use the equity in your home only when you have some, which may not be always. And you can only use each dollar once, which means there may come a time – perhaps when you face a major expense or when retirement's looming – when you'll regret using up yours in maintaining an ultimately unsustainable lifestyle. So use budgeting to ensure this is the last consolidation you'll ever need.

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