Financial Planning

This is part two of the series How to Get Out of Debt.

Every day, tens of thousands of individuals up to their necks in debt emotionally make the wrong decision. In pure desperation, they feel as though they can’t take another month of the debt. Throwing away their biggest ally (brutal rationality), they decide to “just do something.”

“Just do something” is the worst financial advice you can take. Every step of your financial journey should be founded on cautious, rational analysis. The situation won’t change regardless of how we feel about it. Emotions don’t change reality.

Listed below are a collection of actions that many seemingly overwhelmed individuals take. Make sure to tread carefully — a slip up can literally set you back years.  Below are some of the top “debt reduction” mistakes often made:

1. Getting “Debt Consolidation” Loans.

Debt consolidation is extremely popular in a lot of circles for a reason: most people who encourage you to “consolidate” your debt will make money if you do. Basically, a debt consolidation is when someone agrees to “consolidate” all of your debt into a new debt with lower interest rates. The only catch is that they’ll force you to stay in debt longer, and you’ll pay more money in the long run. So much for helpful advice.

The only time a debt consolidation is a “good” choice is if you simply cannot pay current interest rates. This is rarely, rarely, rarely ever true. Chances are, there’s a better way to pay the payments than a consolidation.

Getting a debt consolidation is basically a level of surrender, meaning you’ll be paying more money over a longer period of time. Remember, debt consolidation is also a type of loan — in other words, you’re literally fighting fire with gasoline. Not a good idea.

2. Trying “Debt Elimination” Scams.

If someone offers to “eliminate” your debt without analyzing your situation, just run away. It’s a scam, and they are literally out to get you. There really isn’t anything more to say. The hard truth is that there’s no way to “eliminate” your debt without finding ways to make more or save more money.

3. Closing Credit Card Accounts.

One of the biggest mistakes sounds like it makes sense. Closing a credit account sounds like one is taking control, telling the debtors “no more debt” and is taking a step in the right direction. Unfortunately, it can hurt your credit rating.

By closing a credit account, creditors see that you’re moving away from debt and can’t handle the “temptation” — bad sign. If you feel the need to live without credit, just shred your cards — but keep the accounts open for the sake of your credit score.

4. Making Only Minimum Payments.

Minimum payments are your enemy. The entire reason companies are willing to loan you money is that they’ll be making more. They’re literally selling money for more than it’s worth. The way they make money is through you not paying off your debt as soon as you get it.

There’s also a reason the minimum-payment requirement is so low: the lower it is the longer you’ll be in debt. The longer you’ll be in debt, the more they can charge you. Don’t pay the minimum — make up your own minimum and pay that instead. Shoot for triple the minimum payment, at the very least. Otherwise, you’ll be in debt prison for years longer.

Conclusion

Financial planning is the crux of financial security and freedom. If you want to find a comfortable lifestyle, then it can’t be overstated how much you need to master the basics of financial planning. Without a clear, concise plan for how you are going to manage your money, your chances are slim of ever achieving your goals.

To learn more about the fundamentals of financial planning, check out Financial Planning 101, then feel free to browse the rest of the pages and guides.