debtfree Archives - The Frugal Prof

How Does Debt Consolidation Work

February 22, 2018 by Frugal Prof

Financial Freedom

How Does Debt Consolidation Work

How Does Debt Consolidation Work: In this article, I will cover the definition of debt consolidation, how it works, and why it’s not a smart option for you. In addition, I will address the risks involved with debt consolidation. In the end, they offer debt solutions, but create many more risks and problems.

What Is Debt Consolidation?

Debt consolidation is the combination of several unsecured debts—payday loans, credit cards, medical bills—into one monthly bill with the illusion of a lower interest rate, lower monthly payment and simplified debt relief plan.

But here’s the reality: debt consolidation promises one thing but delivers another. That’s why dishonest companies that promote too-good-to-be-true debt relief programs continue to rank as the top consumer complaint received by the Federal Trade Commission.⁽¹⁾

Consumer Debt Levels

The Demand for Debt Consolidation:

Americans’ total credit card debt continues to climb in 2017, reaching an estimated $905 billion — a nearly 8% increase from the previous year — according to a NerdWallet analysis. [1]

Value Investing

How does debt consolidation work:

Here are the top things you need to know before you consolidate your debt:

Debt consolidation is a refinanced loan with extended repayment terms.
Extended repayment terms mean you’ll be in debt longer.
A lower interest rate isn’t always a guarantee when you consolidate.
Debt consolidation doesn’t mean debt elimination.

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Problems with Debt Consolidation:

When you consolidate, there’s no guarantee your interest rate will be lower.

The debt consolidation loan interest rate is usually set at the discretion of the lender or creditor and depends on your past payment behavior and credit score. Even if you qualify for a loan with low interest, there’s no guarantee the rate will stay low. But let’s be honest: Your interest rate isn’t the main problem. Your spending habits are the problem.

Lower interest rates on debt consolidation loans can change.

This specifically applies to consolidating debt through credit card balance transfers. The enticingly low interest rate is usually an introductory promotion and applies for a certain period of time only. The rate will go up over time.

Consolidating your bills means you’ll be in debt longer.

In almost every case, you’ll have lower payments because the term of your loan is prolonged. You will be in debt longer. Extended terms mean extended payments. Your goal should be to get out of debt as fast as you can!

Debt consolidation doesn’t mean debt elimination.

You are only restructuring your debt, not eliminating it. You don’t need debt rearrangement, you need debt reformation.

Your behavior with money doesn’t change.

Most of the time, after someone consolidates their debt, the debt grows back. Why? They don’t have a game plan to pay cash and spend less. In other words, they haven’t established good money habits for staying out of debt and building wealth. Their behavior hasn’t changed, so it’s extremely likely they will go right back into debt.

How Does Debt Consolidation Really Work?

Let’s say you have $30,000 in unsecured debt. The debt includes a two-year loan for $10,000 at 12%, and a four-year loan for $20,000 at 10%. Your monthly payment on the first loan is $517, and the payment on the second is $583. That’s a total payment of $1,100 per month.

You consult a company that promises to lower your payment to $640 per month and your interest rate to 9% by negotiating with your creditors and rolling the two loans together into one. Sounds great, doesn’t it? Who wouldn’t want to pay $460 less per month in payments?

But here’s the downside: It will now take you six years to pay off the loan. Six. Years.

If that’s not bad enough, you’ll end up shelling out $46,080 to pay off the new loan versus $40,392 for the original loans—even with the lower interest rate of 9%. This means your “lower payment” has cost $5,688 more. Two words for you: Rip. Off.

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You’re in debt with credit cards, student loan debt and car loans. Minimum monthly payments aren’t helping to pay your debt. Something has to change, and you’re considering debt consolidation because of the allure of one easy payment and the promise of lower interest rates.

The truth is debt consolidation loans and debt settlement companies don’t help you cut large amounts of debt. In fact, you end up paying more and staying in debt longer because of so-called consolidation. Get the facts before you consolidate or work with a settlement company. Here are the top things you need to know before you consolidate your debt:

Debt consolidation is a refinanced loan with extended repayment terms.
Extended repayment terms mean you’ll be in debt longer.
A lower interest rate isn’t always a guarantee when you consolidate.
Debt consolidation doesn’t mean debt elimination.
Debt consolidation is different from debt settlement. Both can scam you out of thousands of dollars.

What’s the Difference Between Debt Consolidation and Debt Settlement?

There’s a huge difference between debt consolidation and debt settlement, although often the terms are used interchangeably.

We’ve already covered consolidation: It’s a type of loan that rolls several unsecured debts into one single bill. Debt settlement is different. Debt settlement means you hire a company to negotiate a lump-sum payment with your creditors for less than what you owe.

Debt settlement companies also charge a fee for their “service.” Most of the time, settlement fees cost between $1,500 to $3,500. Fraudulent debt settlement companies often tell customers to stop making payments on their debts and instead pay the company. Once their fee is accounted for, they promise to negotiate with your creditors and settle your debts. Sounds great, right? Well, the debt settlement companies usually don’t deliver on helping you with your debt after they take your money. They’ll leave you on the hook for late fees and additional interest payments on debt they promised to help you pay!

Debt settlement is a scam, and any debt relief company that charges you before they actually settle or reduce your debt is in violation of the Federal Trade Commission.⁽²⁾ Avoid debt settlement companies at all costs.

The Fastest Way to Get Out of Debt

When you consolidate your debts or work with a debt settlement company, you’ll only treat the symptoms of your money problems and never get to the core of why you have issues in the first place. You don’t need to consolidate your bills—you need to delete them. To do that, you have to change the way you view debt! Personal finance isn’t just about money. It is also about psychology.

As I’ve said, It’s not about the Money. It’s about Taking Charge.

The solution isn’t a quick fix, and it won’t come in the form of a better interest rate, another loan, or debt settlement. The solution requires you to roll up your sleeves, make a plan for your money, and take action.

What’s the reward for your hard work? Becoming debt-free!

Thoughts on Consumer Culture and Advertising

December 11, 2017 by Frugal Prof

Consumerism: the preoccupation of society with the acquisition of consumer goods.

Thoughts on Consumer Culture and Advertising:

*Affiliate Disclosure: This post may contain links to companies and products I endorse. I receive a fee for this relationship, but the reader pays nothing. These fees defer the costs of producing this blog.

Peak Consumer Culture: Costco on Circular Day

Don’t get me wrong; I love Costco. In fact, when I lived in Manhattan, I used to rent a car and go to Costco and stock up on all my supplies for the month. I loved those trips. I felt incredibly smart as I drove back to New York with massive quantities of discounted paper towels, toilet paper, frozen dinners, and protein bars.

Now that I live in California, I couldn’t pass up a groupon offer that came my way: $60 membership fee and receive a $20 cashback card as a thank you. Done!

One problem: I needed to join before November 30th.

So here I was on one of the busiest shopping days of the year, when they release their holiday circular, stuck at Costco trying to activate my membership. The definition of consumer culture. Shopping hell is an understatement. The parking lot felt like the parking lot for the SuperBowl, and not in a good way.

I signed up. I got some stuff. I didn’t blow my budget and I left.

Frugal Takeaway: I will share one new observation with you. In a world dominated by Amazon, Costco is no longer a great value. In fact, I think Amazon is now better than Costco, especially if you use Subscribe and Save.

Amazon Subscribe and Save: Amazon gives you a bulk discount of 15% on household items. In fact, if you use Subscribe and Save and then use an Amazon cash back credit card, the savings come to 20% Pretty great, right? You make a list of the items you use frequently on the Amazon page. Then, once a month they send you the items at a reduced price.

If you order more than 5 items, the cost is reduced by 15%. Because Amazon ships the items together, they save on the shipping costs. And they pass the savings on to you. I love it. It’s very convenient. The cost savings are huge and it saves me time as well.

What I bought on Cyber Monday

On cyber Monday, I bought an Amazon Echo with Alexa. It was difficult to pass up at $29.95 and I thought I might like it. Here’s what I discovered. It wasn’t really that cheap. I liked it. It seemed cool and fun. Except that I bought it for music and it had none. Specifically, you could Join Amazon’s music club. Or, upgrade to Spotify Premium, etc… I can use my IPAD to play music from a bluetooth speaker.

So, apart from telling Alexa, “Play music.” I wasn’t getting anything from this purchase. And I would wind up with an extra $5 or $7 monthly charge for music. The Echo was inexpensive and cool. Yet, it really didn’t add any value to my life. And I returned it. Products that don’t add value to my life go back to the store.

Advertising and Consumer Culture

There is a disturbing television commercial I keep seeing. Maybe you’ve seen it. The Parents watch their child in the backyard. It is clearly the West. Its Christmas, but there is no snow. The child looks sad. Shot of the mother clearly disturbed by her child looking sad. There is a problem here. What kind of parents don’t offer a child snow on Christmas?

Solution: Thanks to a new $90,000 Range Rover, the parents drive all night to solve this problem: they arrive just in time for their daughter to enjoy Christmas in the mountains with snow. The problem has been solved. The family is happy. All is well.

The ad is everything that is wrong with consumer society. It is manipulative and ridiculous. It is the essence of everything that is wrong with consumerism in America. Money is nice, but it will not solve all your problems. It feeds into the idea that I can always buy something to “fix” my problem. And I have been guilty of this mindset too.

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Consumerism: Buying to solve my problems.

I admit that in the past, I have tried to use money to solve my problems. It doesn’t work well. I can see how much mindless shopping I have done over the past few years. That is one reason why I suggest people unsubscribe from retail email lists. It removes temptation. I’ve been guilty of using shopping to cure things like boredom or stress. It doesn’t work in the long run.

Stoicism and Consumerism:

I read the book, The Obstacle is the Way recently and it was incredible. It’s basically a historical view of Stoicism.

Stoicism: There is a very simple, though not easy, way of living. Take obstacles in your life and turn them into your advantage, control what you can and accept what you can’t.

Essentially, you have to accept what is. We can’t make everything perfect. Its not a perfect world. Seeking to find solutions through money and shopping is a lie sold to us through marketing and advertising. We have to power to decide what messages are true and which are distortions.

Conclusion:

There is no perfect Holiday season. It’s odd how we pretend to be in a good mood during the holiday season leading up to gift giving. And by February, everyone is suffering a bit of a hangover. The gifts and presents haven’t kept us happy. We have bills. The cheer is gone.

The larger goal in my opinion, is to create a life that is fulfilling most of the time.

Becoming debt free and achieving financial freedom will create a much more fulfilling life.

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Hitting the Wall on my Debt Success Journey

May 30, 2017 by Frugal Prof

Did I hit the wall on my debt success Journey?

Nobody said change is easy. Especially when it comes to paying off debt, creating a budget, and cutting back on credit card spending.

When I began this journey, I started making tons of progress.

I got rid of my storage locker,
Reviewed my bad spending habits- see the dumbest stuff I bought last year,
Cut back on wasteful spending like my health club membership, expensive car insurance, XM Satellite service, and so much more.
I went so far that I cut pizza delivery out of my budget.

It was great. And I cut down on my debt substantially. I had tons of momentum.

My debt reduction plan was making progress. I even started this financial blog to keep me motivated. Which was a great decision too. And thank you all for your support! (And If you’re ready to launch a blog, read the 7 Golden Rules to a Profitable Blog here.)

So, what happened?

I hit the wall last week. I’m not sure exactly why. But, when I bought my new glasses (and got ripped off), I lost some serious momentum. Let me explain.

Adulting: noun. The practice of behaving in a way characteristic of a responsible adult, especially the accomplishment of mundane but necessary tasks.

Budgeting: I’m starting to budget and plan ahead, which is great. But, in all honesty, I was in the habit of doing whatever I wanted whenever I wanted with my money. Change is hard.

It requires patience and discipline to become financially free, debt free, and retire early. It’s a process.

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Children do what feels good. Adults devise a plan and stick to it.” –Dave Ramsey

And that applied to money as well. So, the same day that I finally decided to get glasses, I realized that U2 was coming to town that same weekend. And I wanted to go.

One problem: the cheapest tickets were $250. The bad seats were $250. Ugh. And I had already spent a lot of money on a great concert earlier this year. However, this seemed like a total ripoff.

When did concerts get SO EXPENSIVE?

When did everything get so expensive?

Why is everything so expensive when I’m trying to cut back, get out of debt, and save money?

A few tips on spending less on Concerts:

Change Venue: Ticket prices can vary depending on the location of the concert — even for the same artist and the same tour. Compare prices at concert venues to find lower prices.
Check out the nearby shows: If you live in New York, you can do a quick weekend trip to Philly or a weekend trip to Boston.”
Sit solo: When searching resale options, you’ll generally see better deals on single tickets, says Jessica Erskine, a spokesperson for StubHub.
Attend shows at the fair: OK, maybe Taylor Swift still isn’t in your budget. If you’re not picky about who you want to see live, check the fair circuit. Some county fairs grant free admission to a concert along with paid entry to the fair, which usually costs less than a concert ticket.
Earn cash back: I use Ebates and they give me cash back for nearly all of my purchases including ticketing websites. Ebates gets a commission from stores you shop at and they share the commission with you. Average cash back is about 7%, which is great. Right now, they are offering a Free $10 Gift Card when you join and spend $25. More about Ebates Here.

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Taxes come first: This year I decided that I was going to pay my quarterly business taxes on time. And not wait until April 15th and get hit with a huge tax bill again.

Well, my next quarterly payment is due soon. It’s on my calendar. Its next month. So, I know that I have to pay for taxes, glasses, my bills, savings, and investments. As well as Double car payments to have my car paid off in the next few months.

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Have I gone too far? (I cut pizza out of my budget)

February 27, 2017 by Frugal Prof

Yes, I cut Pizza form my Budget

Have I gone Too Far?

The first step in getting out of debt is to figure out where your money is going. I learned a lot when I reviewed my spending last year. It was a bit depressing, but at least I learned how I was wasting my money.

I wanted to take control. If I spent money on something, I wanted to get value from it.

So, when I reviewed my credit card statement, I noticed that I spent a lot on pizza deliveries. Each large pizza was about $23-$25 depending on whether I had a deal, coupon code, or special offer.

I almost always use a coupon code from Ebates and get cash back from my online purchases. More about Ebates Here. However, pizza delivery is not usually a cash back item.

Either way, it’s a lot for a pizza when you compare it to a pretty good pizza I can buy frozen. It’s an extra $15-17 each time I order delivery pizza. And most of the extra cost is delivery fees.

So, I started buying store bought pizza and I’m saving about $51 each month ($17 savings 3 X per month).

Is it a huge savings? Not really. But right now, I’m fired up. And I want my car payment to go away. And I’m kind of sick of being ripped off.

Why is the delivery pizza so expensive? There’s a $4 delivery fee and taxes plus I give the driver a tip. I don’t know how much of the delivery fee that he/she gets to keep. I like to tip people who work hard. But, I would prefer to keep my money. Delivery pizza is not that great. And it takes much longer.

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The key to this process is to align where you’re spending your money with your values.

What do you value?
What is really adding value in your life?

For some people, cutting the cord on cable is a great way to save money. For others, that would be crazy. As long as you’re getting value, then it makes sense.

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What doesn’t make sense is spending money for a service without actually getting value. I was paying over $100 a month for a storage locker. That is a great example of an item that was adding zero value in my life. Yet, here I was spending money month after month for this service. Until I woke up and said, “No More.”

Bottom line- right now I’d rather be a little closer to paying off the car and being out of debt than pay $100 this month for pizza. Also, I tend to eat too much of the delivery pizza because it’s better than the store kind. So, this should help my waistline a bit too.

Maybe I’ve gone too far. I’m fired up and focused on the paying off my debt. I’m seeing all the stuff I purchased over the last 15 years that added very little value to my life and I’m done spending money that doesn’t add value or make me really happy.

Please share your comments!

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Emergency Fund: An Umbrella for your Life

February 26, 2017 by Frugal Prof

The emergency fund is the first step in any debt free journey.

Emergency Fund Definition: An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness, or a major expense.

*Disclosure: My aim is to recommend products that will truly benefit you. I believe in transparency and want to disclose that I’ve included certain products and links to those products on this page that I will earn an affiliate commission for any purchases you make.

According to financial host Dave Ramsey, the first emergency fund is a $1,000 that should be set aside for unexpected emergencies.

A larger emergency fund is when one becomes debt free except for your home. This should cover 3-6 months of expenses. So, for many people this could be between $12,000-$24,000, depending on your income.

An emergency fund prevents you from becoming desperate when an unexpected emergency happens. And they will. Getting a credit card advance or a payday loan are terrible alternatives.

How big should your emergency fund be?

The more stable your income and household are, the less you need in your emergency fund.

If you’re part of a two-income household or you’ve had a steady job for several years, then a three-month emergency fund is probably just fine.

But if you’re a one-income family, you’re self-employed, or you earn straight commission, then a six-month emergency fund is probably a better idea for you since a job loss could make you unable to pay the bills.

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Where should I keep my emergency savings?

Your emergency fund should be liquid, meaning you need to keep it in a place where you can get to it easily and quickly. (See my post on banks that still offer free accounts.)

The best option is a simple checking account or money market account that comes with a debit card or check-writing privileges. That way, you can pay that doctor or mechanic quickly and with no headaches.

But . . . make sure you’re not keeping your emergency fund in a place that’s too easy to access. You don’t want to be tempted to dip into it!

What’s an emergency?

When a sudden expense pops up, it can feel like an emergency—but that might not be true.

Here are three questions to ask yourself to determine if you need to tap into your emergency savings:

1. Is it unexpected?
2. Is it necessary?
3. Is it urgent?

How to Quickly Build an Emergency Fund

One of the easiest ways to beef up your emergency fund is to sell some stuff! Go take a look in your garage or dig through your closet—is there anything you could part with? Selling some items that are collecting dust can add up to major cash in your emergency savings. And every little bit helps! You’d be surprised at how quickly $5 here or $10 there can add up.

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It’s important to note that investments do not count towards an emergency fund. Your retirement or 401 (k) does not count. These accounts are not liquid or easily accessible (there are serious tax consequences for 401 (k) withdrawals.)

People who don’t have an emergency fund wind up being forced to take out a pay day loan or get a cash advance on a credit card. Getting access to emergency loans or emergency cash is not what I want for you.

I don’t want this to happen to any of my readers. The interest rate on a payday loan and credit card cash advance are incredibly high and will delay your ability to become debt free and invest.

An emergency fund is vital. It’s vital because emergencies happen.

People get sick, lose a job, car accidents happen, tornadoes, hurricanes, riots, fires, earthquakes all happen as well. As an adult, we prepare just in case something like this happens to us. Because they will.

I am in my late 40’s:
I have lost a job,
had a health scare,
lived in a city that experienced a major riot (Los Angeles 1995),
and in a city that experienced a major hurricane and flood (New York 2012).

Life happens. These were all near misses that should have been wake up calls for me.

Don’t wait. At the very least, start saving for your $1,000 emergency fund today!

Having an emergency fund is an umbrella for your life. Be prepared.

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Taking control of my money

February 24, 2017 by Frugal Prof

It’s starting to happen. As the credit card bills roll in I realize that the steps I’ve taken over the last 6 weeks are paying off. My credit card bills are down $700 from my average bill. It feels amazing. I don’t wait to open the credit card bills like I used to do. I’m keeping track of my spending. And it’s going down. I’m using the debit card more often.

I’m questioning each charge- do I really need that? Can it wait? Is it really worth $40 to me? Pretty much, when I buy something now, if I don’t love it, it goes back to Amazon. Yes, I use Amazon for many of my purchases. Now, I’m also looking at their deals- especially lightening deals. I want the best deal now. Before, I would buy anything that was at a discount. Not anymore.

I feel in control and not on the defensive. And it feels really good. Dave Ramsey always says, “the psychology is more important than the math.” Winning with money. Still lots of work ahead of me, but I am on the path and I am in control.

I estimate I will be done with my car payments in 9 months. So excited for that. I’m analyzing that if I can cut back here and there, if maybe it can be sooner like 5 or 6 months. And then that money will go into saving and investing.

It’s starting to happen 👍

Every time I bought an expensive watch this happened

January 31, 2017 by Frugal Prof

I’ve only bought two really nice expensive watches. One was a Rolex and the other was a Bulgari. Each was purchased to celebrate a financial “win.”

(Don’t tell daveramsey.)

And each time, shortly after my financial “win” came a drought. The first time I went from a steady job into a new venture. I went from a steady, reliable income to an unreliable income and lots of financial stress.

The second time was after a fund that I was managing had a great year of out performance. This would allow me to grow my assets under management and bring in many new clients I thought. It wasn’t that easy as it turned out.

Each time, instead of creating a buffer for myself (i.e. an emergency fund or stability fund), I was in need for income shortly after splurging on something I decided I deserved.

Work hard and reward yourself. That’s the way it was.

I was doing really well and needed to show it. I think this is pretty common for men of a certain age, and it probably applies to women too. Perhaps a certain piece of jewelry or expensive bag or purse.

The truth is over time we change. Our tastes change. Do I love these watches the way I used to? Not really. My favorite watch is a bright yellow sport watch I wear on weekends. It cost $50.

And the truth about the expensive ones is that you worry about them. I keep them in a watch winder. I worry about them when I travel. They’re expensive and valuable. Except if I wanted to sell them, I would be disappointed in their real value.

If my business has another great year, I’m unlikely to get a new Rolex or Breitling. Am I becoming wiser as I age? Or have I finally appreciated the value of things?

We work hard and we want to reward ourselves. We want to show our successes.

I’m a big fan of cash right now. Cash always gives you options.

What are your thoughts 👍

How Does Debt Consolidation Work

What Is Debt Consolidation?

The Demand for Debt Consolidation:

How does debt consolidation work:

Problems with Debt Consolidation:

When you consolidate, there’s no guarantee your interest rate will be lower.

Lower interest rates on debt consolidation loans can change.

Consolidating your bills means you’ll be in debt longer.

Debt consolidation doesn’t mean debt elimination.

Your behavior with money doesn’t change.

How Does Debt Consolidation Really Work?

What’s the Difference Between Debt Consolidation and Debt Settlement?

The Fastest Way to Get Out of Debt

Consumerism: the preoccupation of society with the acquisition of consumer goods.

Thoughts on Consumer Culture and Advertising:

Peak Consumer Culture: Costco on Circular Day

What I bought on Cyber Monday

Advertising and Consumer Culture

Consumerism: Buying to solve my problems.

Stoicism and Consumerism:

Join 1,876 others who receive my posts, information, and tips via e-mail.

Subscribe Below

Did I hit the wall on my debt success Journey?

Nobody said change is easy. Especially when it comes to paying off debt, creating a budget, and cutting back on credit card spending.

Join 1,149 people who receive my posts, tips, and information via e-mail.

Subscribe Below

Have I gone Too Far?

The emergency fund is the first step in any debt free journey.

Emergency Fund Definition: An emergency fund is an account used to set aside funds needed in the event of a personal financial dilemma, such as the loss of a job, a debilitating illness, or a major expense.

How big should your emergency fund be?

Where should I keep my emergency savings?

What’s an emergency?

How to Quickly Build an Emergency Fund