Avoid the Trap When You Consolidate Debt
To consolidate debt is a great idea with a trap built into it. The
technique described here helps everyone in debt, but if you have an ongoing
credit card debt you desperately need this article.
- Part I Don't get into debt. Ways to avoid it.
- Part II The big advantages of student loan consolidation
- Part III This article
The Trap
When you consolidate your debt, will you celebrate your freedom
from credit card debt by going out and buying more on your credit card? Do you
really want to live your life in debt, or would you prefer to take charge of
your finances?
It's too easy to consolidate debt. If it hurts to get rid of your credit card
debt you'll find it easier to resist getting into debt again.
Are you getting married? If your partner likes to live in debt, and you want
to become a millionaire, who is going to give way? Most divorces are caused by
money arguments. Discuss it before you marry.
You should consolidate debt if you have no ongoing credit card debt. The
trouble when you consolidate debt is that the whole thing loses immediacy when
you have thirty years to repay.
List your debts
Make a table showing all your debts, the amount still
owing and how much you pay per month. Call the last column "Damage" and
calculate it by multiplying your repayments by a hundred and dividing by the
amount that you owe. The larger the damage, the more harm it is doing to your
finances.
Imagine you had a fictitious list like this
| Mortgage |
$100000 |
$500 |
0.5 |
| College loan |
$50000 |
$333 |
0.66 |
| Personal loan |
$10000 |
$100 |
1 |
| Car loan |
$10000 |
$360 |
3.6 |
| Visa Card |
$4000 |
$250 |
6.25 |
| Master Card |
$2000 |
$200 |
10 |
You should realise if you consolidate debt then nearly all your monthly
payments will be interest, so your debt won't shrink much. When you pay an extra
$100 your debt shrinks by that amount, and you won't keep paying interest on it
either.
List your surplus
Using the methods in part 1 to earn and economise.
Work out your surplus each month after all your expenses. Suppose you can spare
an extra $456 each month. If there are two of you working, try to use all of one
income to get out of debt, because you won't always have both incomes.
See which damage figure is highest. That is the haemorrhage you must stanch
first. In this example it is your Master Card.
Add your $456 to your monthly payment (mostly interest) of $200. You will
shrink your debt by more than $456 because of paying less interest. You'll have
smashed that debt in about three months.
Now your self-discipline comes into play. Don't go out on an expensive
celebration! After 3 months you'll be starting to build the financial discipline
to make you a millionaire.
You've been paying $656 per month that is now surplus, so you add it to your
visa account. That makes your repayments $906 each month. You'll get rid of your
Visa debt in a little over four months.
Now you can pay princely sum of $906 + $ 360 = $1266 per month on your car
loan winning free in less than eight months?#8364;?quite a lot less because of
shrinking interest payments.
To cut a long story short, when you start to concentrate on your mortgage
you'll have $1266 + $100 + $333 = $1699 to add to your mortgage repayment of
$500 per month.
When you start making repayments of $2.2K /month your twenty year mortgage
will suddenly shrink to less than four years. You'll have everything paid off
before your first child is ten years old.
Is it worth the effort?
You may think that the big benefit is freedom
from debt. The biggest benefit is the mindset that you've developed as you
escaped from debt. You are now in charge of your finances?#8364;?not letting the loan
parasites continue to leech you of all your money.
But it gets better. An Australian kid used the above method to get out
of hundreds of thousands of dollars of debt, then became a millionaire while
still in his twenties. He no longer needs to work, but he has a hobby of showing
people how to become millionaires.
There's just one problem. He isn't interested in helping people who
can't save up $20 thousand to invest, because he says they aren't trying very
hard. Now if you take your $2.2 thousand, and start saving for $20K that will
take you less than ten months.
He says that mindset is everything. Now you have the right mindset and have
saved up $20K
