What Comes After Debt Consolidation - A Guide to Staying Debt Free

Joe Schwartz

Joe Schwartz

Debt Consolidation Editor |

So you've taken out a debt consolidation loan. First of all: Congratulations!

These congratulations are offered to you not because you needed to consolidate your debt, but because you recognized, admitted and now have taken the first concrete step towards financial freedom.

You've likely researched this financial option and fully understand that in exchange for loaned money to pay off your unsecured debts, you are paying off your consolidated debt at a lower interest rate. However, the beginning of your financial education has revealed to you that the loan taken is probably over a greater extended amount of time.

Regardless, this will likely prove to be a good decision on your part because you will experience less stress from incessant dialogue with creditors, possible overdue notices jamming your mailbox, bank statements reflecting overdraft charges, etc.

Additionally, other benefits may allow for relationships to be mended, renewal of focus at work and generally, a better overall feeling about you and your future. And so, congratulations, but your road to being debt free has just begun.

Therefore, after entering into a debt consolidation loan, you should be asking yourself: "Now what?"

First of all, breathe and take it at one step at a time. Remember, when someone falls into debt, it didn't just happen overnight. Well-meaning folks who are in debt attained their current level of indebtedness one decision or one negative circumstance at a time. An old saying states, 'We dug our hole one shovelful at a time and that's the way we dig ourselves out.' Remember, the battle of the pocketbook is won or lost in the mind. It is our learned thought processes about money that usually drives our honoring or the dishonoring of our views and handling of money.

Therefore, continue the financial revolution within your mind by searching the Internet about the use and value of one's personal finances. Secondly, research personal financial books by utilizing free resources such as the library or local book store. Another idea may include following trusted financial gurus or businesses that blog about personal finance topics.

Adding to the mix of modifying one's thoughts about money may be the possibility of utilizing a credit counseling service. Often these services are available through various not-for-profits and provide this powerful service at no charge or at a suggested donation so that they are funded to help others. A good credit counseling service will not only provide you tips and tricks to think about and utilize, but will help you to analyze your thoughts and actions based upon your perception of money and its value.

Often, we formulate our thoughts about money as we are growing up. This perception and handling of money is a learned process that was taught by the parents or by observing their handling of finances within the home. If those demonstrated behaviors regarding money are negative, they need to be brought to light and dispelled by readjusting one's thinking and mindset towards money.

The next important step is to devise or revamp your personal budget.

Budgeting and tracking your expenses can be done easily using an app/service or simply using Excel or Google Sheets. You should create a spreadsheet where one side records all of the household's income (after tax), while the other side lists all of the expenses. Those expenses would include rent, mortgage payments, utilities, car payments, insurance, communications (cell phone/internet), entertainment, etc. List all of your expenses.

In fact, a good discipline to follow is, for at least a couple of months, record everything you spend your money on. Listing the major expenses is easy, but when you buy that high-end coffee and pastry or eating lunch at a restaurant, or even something as simple as a candy bar. These purchases need to be written down. They add up.

This exercise may sound extremely trivial, however, it will do three things for your financial consciousness. First of all, it will encourage you to be disciplined in writing down each and every financial transaction and therefore become intentional with your money. Secondly, it will give you a written record of where not only your money goes as it relates to major expenses but the nickel and dime expenditures, as it were, of your money spent. Thirdly, it will help you to realize and develop a consciousness about your spending habits and the reality that the spending of your money equates on how you use your money in exchange for your time and efforts.

Turning to the expense side of the budget, it is important to add two additional expense line items. The first additional line item is to save for unforeseen emergencies. Examples of non-budgeted expenditures could include car repairs, home repairs, or medical emergencies. A good rule of thumb is to have $1,000 saved to cover these costs. These monies can be held in a money market or interest-bearing savings account. Additionally, a financial goal of saving for future emergencies would be to have anywhere from 3 to 6 months of funds set aside in the event that something catastrophic occurred such as medical emergencies or loss of a job, etc.

Another important aspect of analyzing your budget is to look at the expense side of your personal financial ledger with a very critical eye. This critical approach will look at each of the expenses that are being incurred and determine what may be redundant or not needed and therefore needs to be eliminated as an expense. Such an example could be numerous entertainment expenses when in fact all you need is one comprehensive entertainment expense or cutting down on cable TV when you find that you are not utilizing certain channels. It is also important to remember that you can work with your service companies and negotiate a better deal. Remember they want to keep you as a customer and therefore will often "cut deals" with you.

Additionally, if at the end of the month, you find that you have been successful in staying within the limits of your budget, don't be afraid to celebrate your success. Remember, the money that you earned is for your enjoyment and for enhancing the lives of those you love. Therefore, within reason, consider celebrating these major victories by doing something moderate with your money.

Furthermore, if at the end of the month there is any money left over after paying all your expenses, it would be wise to use that money to further pay down your consolidated loan. The reality is that the money that you set aside for savings may earn upwards to 2% in interest. However, for the sake of illustration, the consolidated loan may be at an interest rate of 10% or higher. Therefore, in doing the math, it would likely be more advantageous to send additional money towards your consolidated loan rather than save the money at a lower interest rate. However, it is important to remember that you need to build an emergency fund as much as you are able.

It is also critically important to discontinue or dramatically minimize any use of credit cards from this point forward. It is a proven fact statistically that most individuals who utilize a debt consolidation loan to meet their indebtedness often find themselves increasing their debt because of two things. The first reason why those who take advantage of a debt consolidation loan return to being in debt is that they have not modified their thinking about the proper use of credit. Buying on credit has consequences if the outstanding balance is not paid off during the grace period or if you spend beyond your means. Even if a consumer were to take advantage of an exceptional sale, but puts the purchase on a credit card and does not pay off the entire balance, it would negate the sale price due to the additional interest paid on the outstanding balance.

Consequently, the benefits of any savings realized on buying that product on sale are negated because of the high-interest rate charged by credit card companies on the outstanding balance.

It is also important to modify one's thinking when even contemplating the use of a credit card. There are numerous questions that should be asked before that credit card is pulled out of the purse or wallet. Some of those questions could be, "do I really need to make this purchase", or "am I valuing my workforce energy placed into this purchase by buying on credit with the possibilities of paying interest," or "would I be so quick to purchase this product if I used cash rather than plastic," etc.?

One practical piece of advice, as it relates to credit card use, is to slow down the potential use of your credit card by putting your card on ice. The statement can be taken literally and figuratively as an option to deter the use of a credit card by freezing the credit card in a cube of ice. Consequently, when wishing to use that credit card for personal expenditure, the individual would need to unfreeze the credit card in order for it to be used. The time involved in this process may help the individual to think twice about using the card and the progress that they have made to date and not increasing their indebtedness.

It is important to remember that your major goal and primary focus should be to get out of debt as fast as you possibly can. This should not be an all-consuming goal, but nevertheless, a goal that takes on a high priority.

Finally, the most important idea and affirmation to staying debt free following your debt consolidation loan is to understand that you and you alone are in control of your finances. Your finances and your financial future are not controlled by financial institutions or credit card companies. You and you alone are in control of what happens from this point forward. Consequently, because you are in control, it is important for you to set attainable goals and work towards the achievement of those goals which hopefully encompass your financial dreams and vision for you and your loved ones.

Some of those goals could include building up your savings account for vacations, investing money for your retirement or simply setting aside enough money to purchase, without going into debt, a vehicle or high-end purchase such as a TV, game system, etc.

Another significant goal could be the improvement of your credit score. It is important to understand that, although a credit score does not define you, it is an important tool that creditors use. The FICO score is a formulated number with a maximum score of 850. The number is derived from various variables such as the number of credit accounts, the balance of those accounts, number of credit inquiries, payment and credit history, etc.

The reason why the credit score is important is that it helps to determine the interest rate that you may be offered when taking out a significant loan such as for a vehicle or the purchase of a home. Again, the credit score does not define who you are but is an indicator of your ability to handle credit which speaks volumes to those considering a loan to you. In conclusion, it is also important to understand, realize and accept that we are all human.

Therefore, as humans, even though our motivations may be pure, our actions sometimes fall short of what we wish to attain. Specifically, it is important to understand that you may realize a few setbacks in regards to your desire and goal to be debt free.

However, it is important to accept those setbacks and chalk them up to lessons learned. With this positive response coupled with a greater resolve to achieve your goal of financial freedom accept the experience with gratitude and continue to move forward on your debt free journey.

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