Having a debt consolidation plan is the best way to start your debt relief journey. A plan is one way to guide you through all the tasks that you have to go through. It will give you the information that you need to make the right decisions about your finances. While it will not reduce what you owe, it can help put your debt situation in perspective. It will help you understand how far you have to go in order to achieve debt freedom.
When it comes to getting out of debt, a lot of Americans are admittedly struggling to pay it all off. According to statistics, of the 60% of college students who intend to borrow money to finance their studies, only 65% plan to pay it all off on time. Although the reason why they feel this way is not indicated in the research, it is evident that the average American already has a problem while they are still in school.
Nobody wants to live a life that constantly struggles with debt issues. This is why you need to get started on a debt consolidation plan. The earlier you start, the faster you can deal with all your debt troubles. Once you get rid of your debts, you can fully commit to building your personal net worth.
What makes a debt consolidation plan effective?
You may be wondering, why do you have to create a plan? Why not just send a payment every month to keep things simple?
Here are three important reasons why this is a good idea.
It includes all debts you can consolidate
If you really want to keep things simple, then using a debt consolidation plan is the right way to do it. This plan will help you consolidate multiple debts. As you create the plan, you are forced to look into all the debts that you owe. This is a chance for you to scrutinize all your debts and see the general picture of your financial problem. Knowing the extent of the problem will allow you to create an effective plan to solve it. Not only that, but it will also help you identify the root cause of the problem. This will help you avoid landing in the same financial predicament in the future. It is like hitting two birds with one stone.
It is based on your current financial position
Another reason why you need a debt consolidation plan is that it will also force you to look at your financial situation. Apart from knowing your debt situation, you should also understand your capabilities to pay. The plan will encourage you to look at your income and all the expenses that you spend it on. This will allow you to see where you are possibly overspending. Sometimes, paying off debt is not really that hard because you have the means to pay it back. You might be surprised to find out that you have been wasting money on things that do not really matter. As soon as you stop spending on these, you will find the means to pay off your debts. It is the perfect opportunity for you to really know where you stand financially – and how you can improve it as you pay off your debts.
It takes you closer to your financial goals
Another reason why you should create a debt consolidation plan is to help you align your debt relief program with your future goals. If you do not have one, then this is a good time for you to think of one. While paying off debt is good, it is important to look beyond debt freedom. According to reports, 8 out of 10 consumers admit that debt reduction is their primary financial focus. Unfortunately, the same report reveals that these people are losing sight of other financial goals like saving up for retirement.
If your financial resources are limited, it is understandable to prioritize only one financial goal. However, the debt consolidation plan should be able to help you structure your monthly payments so it leaves room for at least one more goal. The thing with saving is that it does not matter if you can only save a small amount. If you are saving for retirement, the compound interest can help your money grow over time. Surely your repayment plan can make room for even a small amount to get you started on your financial goal.
Tips to ensure your debt consolidation plan is successful
By now, you should be convinced that your debt consolidation plan is beneficial. The next step is to make sure that it has the qualities that will make it an effective tool to get you out of debt. Here are the important tips that will help you create an effective plan.
Align it with your budget
When you align the debt consolidation plan with your budget plan, you are making sure that you have the debts will be funded. If not, knowing your budget plan will allow you to rearrange your income and expenses so it can accommodate your debt payments. If you do not align your repayment plan with your budget, there is a high chance that you will run out of money and end up falling short on your debt payments.
Make it flexible
Another important quality of a debt consolidation plan is flexibility. Debt consolidation, since it does not provide debt reduction, will take time to complete – like a couple of years. A lot of things can happen from the time you started the plan until its completion. This is why you need to make it as flexible as possible. Your finances may not be the same all throughout the plan. You need to know what to do in case your debt payments are compromised. If you get an increase in income, that will not pose a problem for you. However, if you end up with a lower income, that can be a bit challenging. In case this happens, you need to have a backup plan to keep up with your payments. You either lower your expenses or you call your creditors to let them know of your current financial predicament. You may be able to change your monthly payments to a lower one.
Be ready with an emergency fund
Having mentioned the backup plan, your emergency fund should be a part of it. If you do not have one, you can make it as one of the goals that you will try to achieve while paying off debt. Make sure your debt consolidation plan will accommodate this saving goal. It is possible to boost your emergency fund while paying debts through consolidation. This fund will not just secure your financial position, it will also allow you to support your debt payments. When something happens to your income, you do not have to immediately compromise your debt responsibilities.
Make sure your debt consolidation plan has at least these three qualities to ensure that it can help you achieve complete debt freedom.