Turning to a debt consolidation service may sound like a smart move if it’s hard to keep up with your bills, but it is often a mistake. These firms often dangle a lower monthly payment than you would have to rustle up by paying all of your loan payments individually. But what many consumers don’t realize is that debt consolidators do so by stretching out loan payments over a longer term. That means it costs more to pay off the loans in the end.
If you want to get out of debt and stay out of debt for the long term, there’s no quick fix. You need to change your financial habits. That’s not easy but when you experience the peace of mind that comes with being debt free, it will be hard to envision living any other way. Here’s how to get started.
Run the numbers
American households are only using 8% of their monthly income to either pay off debt or increase savings, according to U.S. Bureau of Labor Statistics data. That’s lower than what is recommended in the 50/30/20 rule – where you spend 50% of your income on essentials, 20% on increasing savings and paying down debt and 30% on discretionary purchases.
So how do you uncover extra money to chip away at your debt? Your first exercise: Create a budget. Use a free site such as Mint to draft one or simply list your household take-home pay and your fixed expenses (including mortgage or rent, utilities, auto loans, and minimum credit card payments) and figure out what you have left to spend on extras like vacations, gifts and splurges at the mall.
As you get your financial house in order, take a close look at the biggest expenditure of all: your home. If you’re struggling to make payments on a house, consider selling it and switching to renting while you build the cash reserves you need for home ownership. Meanwhile, reducing your overhead may free up cash you can use to make a bigger dent in your debt.
That’s not the only place you can save. If you get creative, you will be surprised at how many ways you can slim down your household expenses. Put the extra money you find toward paying down debt.
Push the reset button
Among those who consolidate debt, at least 70% end up with as much or more debt after a few years. Debt consolidation can result in a static situation over time, if not a worse one. It may offer treatment for the problem (a mound of monthly bills) but it doesn’t address the underlying issue at hand (money management skills that need a tune-up).
Like making time to exercise or improving your diet, changing how you handle your money requires commitment. But the good news is there are many free tools to help you stay on track, from online financial literacy courses available from sites such as Alison to in-person classes offered by nonprofits and houses of worship in your community. Find one that appeals to you so you can identify behavior patterns that contributed to your debt and replace them with habits that will help you put an end to it for good.
Set financial goals
Some online budgeting and financial literacy programs will also help you set financial goals, whether that is paying down the balance on a particular credit card or getting current on student loan payments. Celebrating the milestones you hit on your journey to paying down your debt will help you stay motivated until you are done. To mark these victories, do something fun that won’t cost you anything but will keep you connected with the supportive people in your life, like going on a hike with a good friend or organizing a movie night at home.