Life after debt consolidation

November 07th, 2011

After you've paid down consumer debt or consolidated them with a mortgage refinance, you may ask yourself, "What now?"

New debt: Just say no

If you've consolidated debts using a mortgage refinance, you haven't truly paid it off but have extended its repayment over a longer term at a lower home loan rate.

Adding new debt can actually endanger your financial well-being if you continue habitually spending more than you have. Increasing your debt load rather than putting real money and effort into fully eliminating your debts can even cause the loss of your home to foreclosure. Now that you've restructured your debt, it is time to create and commit to your plan to achieve financial freedom by paying it off entirely.

Budgeting: Learn it, live it, love it

Budgeting does not mean being a Scrooge; it simply means understanding where your hard-earned money goes, and avoiding ill-considered debt accumulation.

Start by sitting down with your family and note all your monthly obligations and expenses. Try making it fun by offering your kids a reward for thinking of expenses you don't. These should include your mortgage, student loan and car payments, utilities, food, gas, clothing, entertainment, incidentals and savings.

Then, consider the infrequent costs over the course of a year. These might be gifts, charitable donations, seasonal home maintenance expenses, annual membership fees, car repairs, retirement plan contributions, and vacations. An even longer-term budget begins to account for appliance replacement, home repairs, and vehicle replacement.

Stick to your budget for an entire year, and then revise it the next year as needed. It takes a little discipline to stick to a budget, but chances are you will find more ways to save money and develop better spending habits. As part of your budget, find fun and inexpensive ways to reward yourself and your family for your accomplishments along the way.

Saving vs. spending

Now that you understand obligations, and are re-prioritizing them to match your priorities, where should you put your savings to maximize its accumulating effect over time?

  • Use a savings calculator to help budget for future major expenses, for example as a new roof in ten years, new appliances in four years, a new car, etc. You can also use this tool to make general assumptions about simple investment priorities, but seek professional financial advice for further details.
  • Use an early mortgage payoff calculator to see how much sooner you can pay off your mortgage by paying extra principal--and how much that will save you in interest payments over time.
  • Use a mortgage prequalification calculator when considering buying a new home, a rental property or a vacation cottage.

These are just a few tools you can use to maximize the benefit of your debt consolidation. The most important point is to consistently review your habits to make sure you do not fall into the excessive spending patterns that may have created the need for a debt consolidation home refinance in the first place.

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