Needless Debt

In our last post we looked at how you can use credit counseling to help get our of debt. In this post in the “Learning About Debt Solutions” series we are going to take a look at debt consolidation.

About Debt Consolidation

Debt consolidation is similar to the Debt Management Plan we discussed in the previous post about credit counseling in that you can combine your multiple payments under one new payment. A lot of times this new payment will have a better interest rate than some of your high interest credit cards. However, this requires taking out a new loan and generally is only available to those with at least decent credit. Sometimes these payments can take longer to amortize than your original debt even though the payments may be lower.

Cost

Many times debt consolidation should be seen as a method rather than a program. It is simply a loan that you take out and use to pay off your current debts and in turn pay the loan back over time instead. Therefore, the costs will be determined by the interest rate and amortization of the loan. However, as Dave Ramesy notes, this only treats the symptoms of your debt problems and many times you will find yourself right back into debt.

Affects on Credit

Debt consolidation in itself doesn’t have any effect on your credit as long as you make the appropriate payments on the loan you took out.

Conclusion

Debt consolidation is a good candidate for those that may have a history of good credit but may have unforeseen emergencies that came up and caused a lot of debt in a very short amount of time. Debt consolidation loans should be used with care as many of them are secured loans. This means that if you don’t make the payments on your consolidation loan you can lose the item that was used to secure it. For instance, if you took out a loan against your house and you don’t make your payments then you can lose your home.

So you are ready to begin your journey towards financial freedom and you want somewhere to start. This post is for you. The formula for wealth building is very simple: spend less than you are making. Therefore, you have two areas in which you can improve to begin building more wealth. You can increase your income and decrease your expenses. One great way to reduce your expenses is to cut the fat out of your monthly bills. You should begin by assessing your current spending habits and recurring bills and debts. While there are hundreds of areas you can improve upon, let’s take a look at 5 financial obligations you can reduce or eliminate immediately.

1. Cable/Satellite Subscription

Okay, I know what you’re thinking. You already spent $2,000 using your credit card to get your nice LCD TV and have it all mounted on the wall. You’re not about to sacrifice your HD cable and you may not have to.  Cable and satellite TV companies have developed an art to sucker us into buying all of the high-end packages with 1 gazillion channels. The basic cable bill went from $49.99 to $130 really quickly. The fact is, are you really watching the sunshine channel? I’m willing to bet you spend 90% of your time watching channels available in the basic package (and you can generally get HD channels for $5 – $10 more). Cut this extra fat out and get your monthly cable bill back down to $60. You immediately start saving $70/month or more. Still want all those movies? Get Netflix for another $14.99/month and you are still saving $55.

2. Internet Service

If you don’t already have your internet packaged into your cable, you should check into that. This by itself can save you a significant amount of money. Aside from that, check to see what “speed” of internet you are currently paying for. If you have the ultra-premium high-speed package, do you really need this? No! If you are like the typical internet user you surf the internet, download music, and write e-mails. You don’t need the top of the line internet package. Downgrade and save, likely up to $50/month.

3. Cellular Plan

Again, I’m not asking you to give up your cell phone. Take a look at your current plan and see where the majority of your minutes are going towards. See if there are better plans that will fit your needs. Best case, go get a pay-as-you-go phone and stop being a slave to a monthly commitment. This will not only reduce your monthly bills but it will make you more aware of the minutes you are using. If you spend a lot of time “chatting”, check into a VoIP service. There are many extremely cheap or free services that will allow you to use your internet connection as a phone. One popular service is vonage.com.

4. Miscellaneous Subscriptions

The beauty of subscriptions from a business standpoint is that many people continue to pay on their subscriptions even after they stop using the service. Take a look at last few month’s bank statement and take note of any recurring payment that is being made monthly. Then ask if you really need this service. If the answer is “no” or even “maybe” then pick up the phone right now and cancel that subscription. You can always re-active it later. This can include internet services or physical memberships such as the gym. If you aren’t using it, stop paying for it and start saving an extra $120 per month (three subscriptions at $40 per subscription).

5. Bottled Water

Yes, bottled water. Over 30% of households purchase and consume bottled water. Let’s conservatively assume you drink only three bottles per day. Netgrocer.com lists a 12-pack of Dasani water bottles at $9.99 which will supply you with four days of water. This means your cost per day is $2.49 x 365 = $911 each year. K-Mart lists a Brita Base Water Filter Base Faucet Mount for $19.99. You may need to replace the filter at the most once a month which costs another $10/month maximum. Your annual total would then be $139.99 saving you $771.01/year or $64 per month.

These are some very simple and obvious things that you are likely throwing your money away on. Just by making these adjustments you could be instantly saving $300+ each month (your electric and utility bill combined). Alternatively, you might choose to see this as a $300/month raise on your income.