When people have racked up multiple consumer debts, including credit cards, car loans and personal loans a common piece of advice is to ‘consolidate your debts’. But does this advice really work?
Common advice goes along these lines:
- Consolidate debts into a lower interest loan, ideally using home equity
- Maintain your previous repayment amount
- Increase your repayments (if you can)
Sounds good and the maths works, but is it realistic?
Steps 1 and 2 will partially relieve the symptom but not treat the cause.
Step 3 is the key, but won’t happen without behaviour change.
To paraphrase Albert Einstein, “We cannot solve our problems with the same behaviour we used when we created them.”
To really defeat debt you need to treat the cause, which is a habit of over-spending.
If you don’t treat the cause then before you know it, you’ll likely follow this well worn path:
- Reducing your extra repayment back to the new minimum
- Racking up a new debt
- Seeking another debt consolidation
Creating new habits of consistently saving will enable you to stick to your increased repayments and eliminate debt.
It’s not a matter of willpower, because willpower is fickle and unreliable.
To break the habit of over-spending and replace it with a saving habit you need to redesign the way you manage money. It’s easier than it sounds – you can read more about how to do this in my mini-guide.
In isolation debt consolidation won’t work. It can be a helpful tool if you concurrently invest in building healthier habits.
I coach you how to redesign the way you manage money, and aim to save you more in interest than you pay me. Contact me to learn more.