Life can soon become a scary nightmare when you find yourself submerged in debt mire. You’ll certainly not feel like the happiest man on earth when the accusing fingers of your multiple creditors will point at you and demand the bucks. Almost all people in the United States of America have debt and they want to get out of debt for good. When you start creating a rock-solid plan to pay off debt, you often see that it becomes an overwhelming task. If you’re wondering about “how to consolidate my debt”, you must know that there are ways in which you can combat any kind of financial adversity and come out of the harassing financial situation that you’re in. It becomes easier for you when you acknowledge your fault before it becomes a menace. When you approach financial consultants they may ask you to consolidate debt and condense the payments into a single one. However, with the debt myths swirling around in the minds of the debtors, most of them are delaying the entire process as they can’t distinguish the right from the wrong.

Some debt myths to watch out for – Differentiate the right from the wrong

At some point of time, we all have some kind of debt, whether student loans, mortgage loans, auto loans or even credit card debts. While some will ask you to consolidate debt, some others may ask you to go for debt negotiation as a successful way to eliminate debt. Despite all the opinions of your elders, family members and financial analysts, there are some common debt myths that most people will agree on. Check them out.

Myth no. 1: Being in debt is necessary

The fact: Most people justify their overspending and constant borrowing by saying that debt is a necessary evil. However, this is far from being true. Though some amount of debt is needed in everyone’s life to reach a certain financial goal, this can’t be made a way of life. Using the excuse that everyone else is carrying debt just negatively motivates you into taking on more debt, which can have a detrimental impact on your personal finances.

Myth No. 2: You can just borrow more money to pay off your existing debt

The fact: This is a very common thought among most debtors as they believe that they can borrow more money to pay off their existing debt. However, when you consolidate debt or transfer debt, you’re not reducing the amount that you owe, you’re just transferring it. Though this may have a positive psychological impact on the debtor as they feel that they owe less when they don’t have to split their payments, yet when you’re running a budget deficit, you’re actually pushing yourself further in debt.

Myth No. 3: Paying just the minimum amount on the cards is fine

The fact: If you owe a debt and you’re making the mistake of making just the minimum monthly payment, it may take you years and hundreds of dollars to pay off the total amount. Paying just the minimum monthly amount on your cards may be ok but not fine. Always target a higher amount than the scheduled payment on your cards so that this doesn’t cost you dearly in the long run.

Myth No. 4: Filing bankruptcy is the ultimate panacea to your financial woes

The fact: When you speak to debtors with a huge amount of debt on their cards, you will see that the most common thought among them is about filing bankruptcy. But this is not the fact. Though bankruptcy can help you start afresh, it can’t change the bad spending habits due to which you amassed that huge debt amount. Therefore, change your spending habits and try to stay within a budget so as to get back a firm grip on your finances.

Therefore, when you’ve accrued huge amount on your credit cards, you must first educate yourself on the debt myths so that they don’t procrastinate your get out of debt process. Take all the necessary steps to eliminate debt and provide yourself with an answer to your question, “how to consolidate my debt and live a debt free life”.

- This article was written by a guest author. Interested in being a guest author? Drop us a line and tell us what you have in mind!

Many people consider consolidating debt as a step in the process to eliminate debt. Debt consolidation is a viable option, but you need to understand what you’re getting yourself into. Before taking on a debt consolidation loan, make sure you understand the big picture.

So What Is Debt Consolidation?

Debt consolidation in the simplest form is taking out a big loan to pay off smaller loans. There are essentially three ways to do this:

• Home Equity Loan/Home Equity Line of Credit/Cash Out Mortgage
• Personal Line of Credit
• Credit Card Cash Advance/Credit Card Balance Transfer

Each of these methods has pros and cons. So, let’s discuss the differences between these options.

Home Equity Loan/Home Equity Line of Credit/Cash Out Mortgage

There are numerous names for these types of loans, but at the basic level they’re all mortgages against your house. With each of these mortgages, some of the equity is taken out of your house in order to pay off other debt. In some cases, the original mortgage is rolled into the new loan, in other cases, the new loan takes a second position after the existing debt.

The positive part of consolidating your debt using a mortgage based consolidation is that the interest is probably tax deductible (depending on your specific situation). However, there are several downsides to this type of debt consolidation method. First, you have to have good credit. Second, you have to have enough equity in your home to borrow against (and who has that nowadays?).

But, the biggest issue with this type of consolidation lies in the difference between secured and unsecured debt. Unsecured debt is debt that doesn’t have something that the bank can repossess to pay off the debt (think credit cards). Secured debt is debt that is secured by a physical asset that the bank holds a lien on until the debt is paid off (typically, mortgages and car loans). Because of this “security,” secured debt is typically held at a much lower interest rate than unsecured debt. Sounds pretty good, right?

What happens if you don’t pay your credit card bill? You mess up your credit and get a bunch of angry phone calls. What happens if you don’t pay your car loan? You wake up one morning and your car is gone. And if you don’t pay your mortgage, they come throw you out on the street. So, do you really want to pay off unsecured debt by putting your house at risk?

Personal Line of Credit

In order to get a personal line of credit (i.e. personal loan), you need excellent credit. However, even with excellent credit, odds are that you’re going to get hit with a fairly high interest rate (which is likely to be variable). The downside here is that you’re likely to increase the interest rate that you’re paying.

Credit Card Cash Advance/Credit Card Balance Transfer

Consolidating your debt by rolling it onto a new credit card can make sense in some cases, especially when you get a very low interest rate (such as a temporary rate of 0%). You just need to make sure that you’ll be able to pay it off before the temporary rate expires or you might find yourself looking at a worse situation than you started with. In addition, opening a new account will affect your credit score, most likely in a negative way.

Final thoughts

When you’re considering debt consolidation, make sure you understand the long term impact of your decisions. If you’re unsure, feel free to post your question on the get me out of debt forum.

Why Going Out With The Guys Is Not An Emergency

Ok, first of all, I need to say that I completely understand the desire to go out and hang out with the guys (or girls). But this is about priorities. Living the way you’re currently living has put you in the situation you’re in. It’s time to make some changes today to create a debt-free life down the road.

With that said, socializing is important, but an emergency? An emergency is a blown tire on your only functional car or a failed air conditioner in the middle of summer. A kid falling off his bike and breaking his arm is an emergency. (Incidentally, this is why you need to build an emergency fund.) Getting drunk in a strip club? Not so much. Am I saying that you can’t “hang with the gang”? Of course not.

Find Less Expensive Things To Do

Instead of going out to a sports bar and dropping a hundred bucks on drinks and bar food, have everyone in the group bring a six pack and a steak and go to one person’s house, fire up the grill and turn on the game. You just saved eighty bucks, plus you’re eating a hell of a lot healthier than you would have at the bar. Plus, you’re a lot less likely to get yourself into trouble!

Instead of grabbing a group of girls and spending a fortune at the nearest multiplex, stop at a Red Box and pick up a movie for a buck and go to a girlfriend’s house with the group. You’ll be a lot more comfortable and you’ll save a bundle!

Even if you have a family, have you looked into minor league teams in your area? Taking a family of four to a major league baseball game, with a hot dog, peanuts, and a coke for each of you can easily be a two hundred dollar (or more) afternoon. Go to a minor league game with a picnic lunch and see a game in a much more intimate setting for under thirty bucks!

Involve Your Friends

I’m not saying that you need to unload your financial details on your social circle. I am saying that your closest friends should have an idea what you’re trying to achieve. It will make it infinitely easier to stick to your goals with the support of others. Plus, you may find that your friends are stressing over an overextended budget too!

What’s Your Goal?

Have you set a goal for financial freedom yet? If you have, and you’re serious about it, it’s really easy to make the choice between expensive nights out (creating an even bigger debt bill) or cutting back a bit to eliminate your debt!

With any debt elimination plan, you’re going to feel a sense of sacrifice. Depending on the size of your debt burden, this could last for a few months, or it could last for several years. Obviously, when it’s all over, you’re going to be excited and ready to party, but being 100% debt free isn’t the only debt elimination goal you should celebrate!

Don’t Forget The Other Goals

When you set goals, you should set short-term, mid-term, and long-term goals. And you should celebrate achieving each of them. Obviously, if you pay off a $300 credit card balance, you shouldn’t go buy a flat screen TV. But taking your family out for a nice dinner after paying off a $10,000 credit card bill makes perfect sense.

The important part is that you should celebrate each goal in a way that’s appropriate for that goal. Plan the celebration as part of setting the goal. Writing the goal down makes it real — planning the celebration makes it something you want to achieve (and more importantly, makes it easier to say “I shouldn’t go out to that extravagant restaurant that I can’t afford right now, but by waiting I’ll be able to buy a new car for cash next summer!”).

Include Your Family And Friends In The Celebration

Remember, the sacrifice hasn’t been just yours, your family has been sacrificing too! If you’ve been striving to pay off your mortgage early, you’ve probably skipped a vacation or two along the way. Make sure that they know what you’re trying to achieve and that they’re on board with the goal — and that they’re part of the celebration!

How Big Should The Celebration Be?

Obviously, this is a personal decision, but a good target is probably something no bigger than the size of the monthly payment you just “retired”. If it was your last debt and you’re now 100% debt free, maybe there’s a bigger reward waiting, but the important part is don’t let the reward put you back in debt! And if it’s a reward for an interim goal, rewarding yourself shouldn’t take you away from your long term strategy.

For more tips and ideas, come discuss it in the get me out of debt forum!

How To Develop A Spending Plan

So what is a spending plan? I prefer the term “spending plan” over budget even though they’re really both the same thing. Budgets make many people think that they’re of scarcity and deprivation. Spending plan, on the other hand, evokes an image of being in control and living your life the way you choose.

Before attempting to develop a spending plan, you need to figure out what you’re spending money on. After doing that, make sure you know what you actually owe. Finally, you need to figure out how much you spend on your other “necessities”.

Make A List Of Your Income and Expenses

It should be fairly easy to calculate your income. Just look at your last paycheck! For the purposes of developing a spending plan, all you need to worry about right now is your net paycheck.

You should be able to determine your ongoing expenses by looking at the list of things you’re currently spending money on. In addition to that, you should add expenses that you only have a couple of times a year (for instance, if you pay car insurance every 6 months, you should add 1/6th of your car insurance bill to your monthly total).

As you’re compiling the list, mark each item as being either mandatory or discretionary. Note that a single item could be partially both. For example, food is obviously a mandatory expense, lobster every night is obviously discretionary. The minimum payments on your debt are mandatory, any extra principal payments are discretionary.

Don’t Forget About Savings

Make sure to include your planned savings on the list. It you know you need to build an emergency fund of $1200 over the next year, add $100 to your monthly expenses — and mark it as a mandatory expense!

It might be a good idea to list any other savings you’d like to do here, too, but you should probably consider these other savings as discretionary, at least until you’ve covered your mandatory expenses.

Now For The Plan

If your mandatory expenses are less than your income, you can start choosing your discretionary expenses that you’d like to include in your plan. If, however, your mandatory expenses are higher than your income, you either need to look into cutting back your expenses (is that unlimited texting plan really mandatory?), or you need to look into alternate means of getting income, such as a second job.

When you’re planning your discretionary expenses, you should should consider using the debt snowball to decide which debts to pay first.

Wrapping Up

Developing a spending plan is not difficult, but it does require that you’re honest with yourself. Make sure you know what your debt elimination goal is. And come tell us about it in the get me out of debt forum!

There are many different ways to get out of debt. One of the simplest to use is The Debt Snowball.

Implementing The Debt Snowball

The first thing you need to do when implementing the debt snowball is to determine how much debt you actually have. Take note of each debt, what the interest rate on it is, what the total balance is, and what the minimum monthly payment is.

Next, find out where your money goes take note of how much room you have in your budget for debt elimination purposes. If there’s anything you can cut out of your discretionary expenses, or any additional sources of income that you can consider, this is the time to do it! If that sounds too uncomfortable, you need to revisit your debt elimination goal.

List your debts in order, from the highest interest rate to the lowest interest rate. Except for the first item on your list, your monthly payment for each of your debts should be the minimum monthly payment. For the first item on your list, you should pay everything that you have left in your “debt retirement” bucket every month until it’s paid off. Once it’s paid off, you should add the entire amount you were paying to the next debt on your list. With each debt you pay off, the next one goes faster than the last, hence the “snowball”.

Final Thoughts

There’s more than one way to implement a debt snowball. Some people say that it’s better to rank your debts from smallest to largest, that way you see faster results. From a motivational perspective, that may work better for you, even though you’ll pay more in interest over the payoff period. Either way, do what works for you, and make sure to celebrate your success! Come discuss it on the get me out of debt forum.

Ok, so you’ve decided you want to get out of debt. Otherwise, you wouldn’t be here reading this site! You’ve already determined how much debt you actually have and you know where your money goes. Now, it’s time to set a debt elimination goal.

Why do you need a debt elimination goal? Research shows that people that set goals are significantly more likely to get their desired results than somebody that doesn’t set a goal. Think of it this way, if you were going to get in your car and drive, what are the odds you’d get where you wanted to go if you didn’t know where you wanted to go? On the other hand, if you decided that you wanted to go to Disney World, you’d have a much better chance to get there!

Be Specific!

“I want to be out of debt” is not a goal. It’s a wish. “I want to pay off $20,000 in credit card debt by my 45th birthday” is a goal. What’s the difference? Goals are specific and measurable. You can be held accountable for a goal. This is not the time to be wishy-washy! Don’t know what your goal is? Go sit down and figure it out. I’ll wait.

Ok, did you figure out your goal? No? I said I’d wait…

Got it? Did you write it down? No? Go do it! Why? Back to the research. People that write down their goals are more likely to achieve them than people that just decide to achieve something. Again, it comes down to accountability. If you write it down, it’s harder to ignore — and harder to forget! So set a goal. Remember, specific, and measurable. And then write it down! If you need encouragement, come discuss it on the get me out of debt forum!

If you want to get out of debt, you need to know where your money is going. Without this information, you’ll never reach your debt elimination goal.

So how do you figure it out? Simple. Track your expenses for a month or two! Seriously, get one of those little spiral notebooks that fit in a pocket, and every time you spend money, write down what you bought/paid for, how much you paid, the method that you used to pay for it, and if it was mandatory or discretionary. For the record, I really do mean everything. If you buy a pack of gum, write it down. You might be extremely surprised to find out how much you’re spending in the vending machine at work. At the end of the month, you’ll have a really simple log to figure out where you’re spending money.

This method has an interesting side effect: when you’re recording everything that you’re spending money on, you’ll probably find that you’re a lot slower to spend money on trivial things, just because you don’t want to record it.

That’s it! Really, it’s that simple. I’m sure I could come up with a way to overcomplicate it, but why? Want to simplify it even more? Use Mvelopes. By connecting it to all of your credit cards and bank accounts, you can automatically track and categorize your expenses! Need more info? Come discuss it on the get me out of debt forum!

There are very few questions that are simultaneously as simple and complicated as the question “How much debt do I have?” Seems like it should be a simple question, right?

But what gets included in the total? Credit card debt? Obviously. Car loans? Of course. Student loan debt? Probably. Mortgage balance? Ummmm…

So what should you do? Well, for starters, you should start with what you’re comfortable with. Don’t lie to yourself, but that doesn’t mean that you need to beat yourself up excessively either. If your goal is to eliminate all of your credit card debt, then worry about your credit card debt. If you want to be 100% debt free, then you should count everything.

Take A Page From The Mortgage Industry

The banks encourage people to get in debt, so why not use their calculations to determine your debt load? When applying for a mortgage, the mortgage companies typically expect borrowers to have no more than 25% (used to be 28% before the meltdown) of debt related to housing.

So count your housing debt in one bucket. This would include your first or second (or third!) mortgages, any Home Equity loans (remember “Home Equity”?), and any HELOC (Home Equity Line Of Credit) that you have.

In addition, the banks want to see borrowers total debt burden under 35% (used to be 38% or even 41%). For this, include your credit card balances, car loans, student loans, store credit, etc.

Final Thoughts

It’s worth noting that the banks don’t look at your total debt — they look at your debt burden. Specifically, they’re worried about how much you pay monthly to service your debt. Don’t get caught in the trap of thinking in terms of monthly payments! Your debt is the actual amount owed, not what you pay on it monthly. Now is the time to be honest with yourself!

Why You Need To Build An Emergency Fund

Many people think they don’t need to build an emergency fund or don’t think they’re capable of building one. Whether you’re trying to get out of debt or not, building an emergency fund should be one of your highest priorities, above virtually any other financial goal. Recent economic events and the abysmal job market should make that abundantly clear.

Some people (and I was one of them) think that their jobs are safe. I had a “secure” job, working for a reasonable (albeit slightly under-market) wage. I was integral to the company’s business. And then September 11th hit and business started drying up. It was a matter of days before I found myself out of a job. That was 10 years ago and I’ve since found a much better job, but I’ll never be caught again without an emergency supply of cash.

But a job loss is not the only reason to have emergency cash. Even if you don’t lose your job, it’s always a good idea to have a “cash stash” in case your car breaks down, or your air conditioner quits, or you have an unexpected medical bill. The “gurus” recommend building up a cash reserve of 6 months’ expenses. And that’s great advice! But it’s unfathomable when you’re looking at $20,000 in credit card debt.

Instead of stressing over stockpiling thousands of dollars while trying to keep afloat in a mountain of debt, work towards an emergency fund of $500 to $1000. Most emergency issues that come up only cost a few hundred dollars. Having that much on hand will prevent you from needing to put that unexpected expense on a credit card at 18% or more. Once you’ve finished paying off your debt, then you can worry about building a larger emergency fund.

Build an emergency fund and you can take a lot of the stress out of your life! Discuss your experience in the Get Me Out Of Debt Forum.