How Does Debt Consolidation Work?
Debt consolidation usually involves taking out a low interest loan at a fixed rate to reduce monthly payments. This often entails rolling many loan amounts into one. An asset is used as collateral for the new consolidated loan. The most commonly used asset is a home. This means that if the consumer defaults on the loan, they agree to allow the house to be sold to collect the remainder of the funds. This method of debt management is usually secured to pay off student loans or credit card debt that carries large interest rates that may increase frequently. There are pros and cons to debt consolidation.
The Positive Side of Debt Consolidation
On the positive side, it allows consumers to pay down the principle amount faster. As a result, credit scores may increase. This is especially useful when the consumer is trying to secure a mortgage to buy a home. The consolidation takes many small payments, with variable high interest rates and rolls them into one monthly payment with a lower interest rate. This takes away the stress caused by trying to manage many payment due dates to avoid late fees. The smaller payment makes it easier for most people to create a budget they can stick to.
Debt consolidation loans often extend the original terms of a loan. If the balance would have been due in six months, the deadline can be moved back to 12 or 18 months without penalty. If a home equity loan is involved, the interest may be tax deductible.
The Negative Side of Debt Consolidation
One of the disadvantages to this type of program is that it does not teach the consumer new habits, it just enables them to continue the bad spending habits that have already been established. If they don’t stop using their existing cards, debt will continue to build and their credit may be negatively affected.
Debt consolidation does not work for everyone. Many people believe that a consolidated loan is easy to get. While that may have been true at one time, it is not today. If your credit is still in good standing, it may be the most appropriate option. Though the monthly payments and interest rate has been reduced, the amount due has not. This means that the loan has been stretched out which will possibly take years to repay. It is only shifting the debt from immediate to long-term. Many people find debt settlement more appropriate for their situation.
It’s pretty obvious that in the short term, saving money rather than spending it is going to benefit us financially, but what about other, more long term impacts of saving? It seems like more and more emphasis is being put on spending money, and ever since the 1980s where excess and spending really came to the fore, this has been the case. These days though, things are a little different, and affluence is not quite so wide spread or common place for most of us. So the impacts of our old spending habits are proving more and more important to break.
Saving with John and Lee
It’s always good to talk in terms of examples when looking into a concept or explaining an idea, so let’s run with one here. John and Lee have two kids, Rick and Sally. John works a regular job where he receives an average wage, and Lee is looking to start looking for online jobs after having been at home with the kids up until now. The couple have a mortgage, a few credit cards and store cards, as well as a personal loan and car loan. Nothing too special in terms of their circumstances here, and something you would be likely to find in your neighbourhood.
If Lee and John manage to save a little money by reducing their spending habits (which often takes but a little adjustment here and there), their family finances can look a lot different. There are unnecessary excesses in all our lives, and if we are honest with ourselves we will be able to name them pretty quickly. These excesses may involve occasional shopping sprees, regular spending on things like cigarettes and alcohol, entertainment or leisure activities that we really do not need to partake in – whoever you are, whatever your lifestyle, there are things that you do not need to be spending your money on.
Turn your spending into saving
By turning that spending to saving, you are having a marked impact on your finances and your life. Let’s return to our example. By reducing their spending by just $100 a month and instead turning that money towards reducing their levels of debt, John and Lee are choosing more than just financial savings. By paying the extra off their credit card, they are saving a bunch of interest. If they continue until one of the cards is repaid, and then snowball the minimum credit card repayment and the $100 towards paying off the next debt, they will be surprised at how quickly their debt is looking lighter – all from such a little sacrifice.
The long term impacts of reducing their spending and therefore their levels of debt is enormous. Not only do they save money, but their family life will improve as they no longer struggle under the burden of owing money here and there – in effect limiting their lives. The kids will be able to learn valuable lessons in regards to debt and saving money and have positive financial role models for managing their own personal finances as their grow older. If the family is able to start saving money and putting their money to work for them, then the possibilities really are endless – and all it takes is a simple mind shift, a decision really, and then to follow it up with concrete action.
Spending and overspending is easy. Unfortunately, stopping spending requires a lot more willpower!
Everyone has the odd splurge every now and again but if you find yourself regularly in the red you could be living above your means. Here are a few tips to help you take control of your spending.
Find out what you already own
When was the last time you really looked through your wardrobe, drawers or kitchen shelves? Before you go shopping, spend some time thinking about what you need to buy and make a list. Take this list with you and you will be far less likely to buy things you already own or simply do not need. Just make sure you stick to your list and avoid the temptation of buy-one-get-one-free offers!
Choose your time
Although shopping can be a great mood booster if you are feeling bored or depressed, the financial hangover that comes after a shopping spree doesn’t have the same feel good effect. Avoid the shops if you’re feeling down, as the temptation to spend can be difficult to resist.
Get into the habit of questioning yourself every time you are about to buy something. Ask yourself “Why am I buying this?” before handing over your cash or card. When you can’t answer or find yourself making up an excuse, put the item back. You can always come back later if you decide you really do need it and the chances are you won’t.
Although the thought of drawing up a budget can be daunting to say the least, budgeting really is the best way to take control of your spending. By examining your monthly income and outgoings you will find out exactly how much you have to spend and can usually spot ways to make savings. Once you have analysed your spending, allocate yourself a monthly budget and stick to it.
Go on a spending holiday
Really put your money-saving prowess to the test by going on a spending holiday. Decide on a week during which you will spend nothing at all, except on unavoidable costs such as travelling to work. Prepare for the week by shopping for groceries and planning a few free activities like going for walks or visiting friends. Don’t carry any credit or debit cards and restrict yourself to keeping just a small amount of cash with you for emergencies.
The recent economic downturn caught many people by surprise. Thankfully interest rates have remained low, helping homeowners keep on top of mortgage payments. Nobody has a clear idea of what the future holds for UK consumers however, as the political and economic situation remains uncertain. If interest rates go up and inflation causes the cost of goods to rise, this could spell trouble for many households who would struggle to pay the bills.
Not as expensive as it could have been in the run up to Crimbo, but the works Christmas do cost me a few notes . . . As did taking the bambinos out the next day:
Becks – 5.50
Blue WKD – 5.00
Snackage (chorizo, pastrami) – 4.00
Total = 14.50
Kids & wife supplies whilst I went out – 10.00
Pizza for kids – 13.99
Pre party drinks – 20.00 (3.70 a pint in Rain Bar in Manchester – bought a few)
Petrol for lift on way home – 20.00
Total = 63.99
Gifts in Poundland – 21.00 (yes, 21 gifts, seriously, check it out)
Lunch from Greggs – 4.50 (for 5 of us)
Car parking – 3.50
Evening supplies – 9.50
Total = 38.50
Hi there. After a good 19 months out of the game I thought it was time I got back to this part of my life. I originally started the blog because times were quite hard and I was watching the pennies pretty closely. Well unfortunately, things haven’t really changed that much, another little nipper has joined the clan and money is just as tight as ever! LOL! That’s not me on a downer . . . That’s just the way it is!
Daily Spends for 09.12.10
£10.00 – petrol
£1.50 – breakfast (sausage & beans)
£1.80 – lunch (tuna & baked potato)
£13.30 – Total
£1.99 on lunch
£12.57 on beer
£14.99 on Indian food
£38.52 running total for May