Avoid These Financial Traps Part 2
With the New Year upon us many people will decide to take a fresh look at their finances. Some will choose to start hacking away at debt while others will decide how much they will give away this year. No matter where you are on the spectrum there are some things that you should look out for when it comes to your finances.
Today’s financial trap to try to avoid has to do with debt consolidation companies. For those of you who are not familiar with what a debt consolidation company is or what they do it is pretty much as it sounds. They will consolidate your debt for a fee and instead of paying your creditors you now have one company and one payment to make. The appeal to such a thing is that if you can get a lower average interest rate on your money you will actually be able to pay less each month in order to pay off your debt.
The problem with this is first off that it is not free. Debt consolidation works by basically giving you a loan for the money with extended repayment terms which means that you will end up paying more for you debt, especially if you do not get aggressive and pay it off as fast as you can. The second problem with debt consolidation is that you lose the small wins of paying off smaller debts which are extremely beneficial to have when paying off debt.
So what is the alternative?
The alternative is to first and foremost get on a tight budget and to stop using credit. You should also get at least a small emergency fund to start out with of roughly $1000 or whatever you deem necessary to get you through an emergency, this will get bumped up to 3-6 months of living expenses once you are out of debt so for now try to keep it fairly small so you can put all your focus on paying off your debt. If you know something is going to be coming up such as maybe your transmission is starting to fail then start saving for that right away before it becomes an emergency that will have to be paid for with debt. Once you have stopped going further into debt, you have a small emergency fund and you have a budget in place you can start throwing any extra money that you have each month toward your smallest debt. Pay minimum payments on the rest, but pay as much as you can (without going into debt) on the smallest debt that you have and do not touch your emergency fund for anything except an emergency (think broken furnace, burst water pipes, blown car tire).
It’s tempting to try to get extremely mathematical and sort your debt by the interest rates, which you can certainly do if they are roughly the same amount, for example if you have a $500 debt at 5% interest and a $550 debt at 15% interest you might as well pay off the $550 first, but it’s more important to see that you are paying things off and gaining traction. When you get your smallest debt paid off then throw all of your extra cash each month at the next smallest which will help you gain greater traction. The quicker you pay off your smaller debts the more cash you will have to throw at the next smallest debt and before you know it your extra cash to put towards debt each month with be substantially higher than when you first started.
Don’t take my word for it though, check out this article from TIME and decide for yourself.
Having personally used the debt snowball method I can tell you that it works and paying off those pesky smaller debts first really does help you gain traction and feel like you are making headway. As the debts get bigger to pay off you will have more money going to pay them off, but they will likely take some time to pay off, but don’t give up. Getting out of debt is completely worth it.
If you found this information useful please share it and be sure to follow HigherPowerLiving.com to stay on top of the latest information that is posted. Also, please feel free to comment and ask questions. My goal is to help people and questions help bring clarity and your questions can help not only you, but also others. Also be sure to keep your eye out for the next post of financial traps to avoid, I will be talking about debt settlement companies next and why you should consider other options first before committing to debt settlement.
Have a blessed day,