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Should I get a debt consolidation loan?

This is a question I am asked a lot during my coaching sessions, and today we will look at the answer to that question.

The debt management process begins by taking an inventory (know as a preliminary budget) of your current financial situation. You must first know exactly what you have coming in (income), and where is it going as it is leaving your account (outgo) before you can make an educated decision about a consolidation loan. I find that most of my clients have no idea where their money is going which makes them think they can’t afford their current payments. Nine times out of ten, this is not the case.

First, you must sit down (if married you must do this together) and write down your exactly what you spend each month, and I mean down to the penny. How much is your rent or mortgage, utilities, insurance, gas for the cars, eating out, entertainment, etc. Everything you spend money on should be written down, and I mean everything even those dollars you feed into the soda machine everyday has to be accounted for.

From there some tough decisions must be made. You see, money management is not about math, it is about behavior. Let me repeat that, money management is about behavior. When I work with a client, on average, I find between $500 and $700 that is being mis-managed or spent without a plan each month. Let’s split the difference, an extra $600 a month is $7200 a year, that can pay off a good chunk of debt don’t you think?

How do you find mis-spent money like that? It is all about putting your spending on paper (or in a computer program) so you can see it written down. Most of the time it is in the eating out and entertainment funds. Think about it, if you are spending $350 a month eating out each month and another $200 going to the movies or other entertainment, that is $550 a month that you can re-allocate to paying towards debt. It is much smarter to do that, adjust your behavior a little, than just cop out by consolidating bills so you can continue to play and get what you want “now” instead of saving for it.

Debt consolidation loans do lower your monthly payments by combining all debt into one payment (which many times is associated with security such as your house, i.e. second mortgage) but what a debt consolidation loan doesn’t do is teach you discipline to start living within your means. If you don’t learn that lesson, and change your spending habits you will actually charge up additional debt on top of the debt consolidation. Your cards will have no balances on them because you moved all those dollars over to the new loan. The average person has more debt within two years of consolidation than they did prior to consolidating. Why, because the spending behavior was not changed, then what, a third mortgage? At some point in this behavior pattern you will have no more to mortgage and something will be foreclosed or repossessed….not good.

Debt consolidation is a band aid fix of lowering monthly payments to give you more money to spend without a plan each month, not teach you how to manage your money and pay off debt. Rather than doing that, I recommend actually fixing the problem which is your spending behavior. Sometimes you can do it alone, many times you need the assistance of a professional, either way, debt consolidation loans is not the answer to solving a cash flow problem.

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