Every human being, couple, and family has a special combination of what works for them. Some people find it early on and rock it, be it a nice car or a paid-off home. Some people are clueless forever, and some just enjoy the journey. This is true for all health: food health, physical health, emotional health, and yes, financial health.
Consolidating our debt
JHubbs and I need a hard and fast goal to write down and meet. So, we made the decision to refinance our consumer debt with a hefty loan and a hefty monthly payment, and we have a debt-free date 18 months from now. Even though it will cost us about $500.
Here are a few reasons we chose to consolidate our debt instead of paying it off the good old fashioned way
The interest rate of the whole loan is comparable or better than the current rate on the majority of our debts
We now have one large payment per month
We now have one thing to aim at with our surplus funds
We have no choice but to pay it all off in 18 months and are able to set a goal to pay it off in 12
A few things to think about if you decide to consolidate your debt
Do not refinance and then ring up more debt on the now-open credit cards. JHubbs is especially good about not racking up more debt and so far I have been behaving well also. We left the cards open for true emergencies (read: someone is in the hospital), but that is for our emotional health, not our financial gain.
Do not refinance with a sketchy bank or online service. We chose a bank I have been a member of for 20 years and with which I had a proven payment record. Though to be honest, I have no experience with online consolidation services. It just seems like a bad idea for me.
Do not refinance if this isn’t your financial style. Try new things and try easier things before you make a big decision. Just because it works for us doesn’t mean it will work for you and just because snowballing payments works for someone else, don’t feel crappy if it doesn’t work for you. What matters is that you make informed, consistent decisions!
Do the math and make sure it is worth it. Before we heard back from the bank, we talked about what our “comfort interest number” was. As in, what is the most amount of money we would be comfortable paying a bank to help us get out of debt. If we received a decision that meant we were paying $1,000 in interest more than what we would have already paid, it would not have been worth it. But to us, $500, while no small sum, is worth losing the stress of multiple payments and the guarantee of an end date. However, if we had received a poor interest rate and it would cost $800-$1200, it may not have been worth it to us.
So far, I can say that this has had a dramatic impact on the emotional side of our finances. Since my “style” is workaholic, I tend to check our finances three or four times per week. That is a lot of signing in and out of accounts and tracking! As the “account closure” letters come flying in, each is one more account I don’t need to be worrying about in the back of my mind. I have more time to focus on knocking out the lump sum.
I also love the freedom of mini-snowballing on the debt. Besides the one monthly payment, I can now very easily transfer $20 here and $90 there, depending on what is remaining in an account after a given budget period. Before we consolidated, those discretionary amounts would end up in our checking account or going to (what felt like constantly) some small bill without making any overall progress.
How did our story end? Stay tuned for the update to see if it panned out a year later!