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"Money is better than poverty,
if only for financial reasons."

Woody Allen
The Tools To Make Your Own Decision about Debt Consolidation

In order to figure this out for yourself, youíll need to look at the numbers. That means youíre going to have to work up a chart or a spreadsheet and do a little addition to see what youíre dealing with.

Letís start with the end goal. You need to figure out how much you owe and where you owe it. Right now, youíre probably in the dark (or at least in the dim) about that.

Running the numbers is not really difficult, but it does take some time. The first thing you need to do is figure out what you actually owe. You probably have so much debt it's coming in from all different angles. So let's start with credit cards.

Gather up all of your latest credit card statements. You need to start a list (or a computer spreadsheet) that lists the card name, the total amount owed, and the minimum monthly payment. It is also very useful if you can also make a column of the interest rate you're paying. If you're not sure about any of these amounts, get out the card and call the toll-free number on the back; they should be able to tell you exactly what you're paying and the interest rate.

You now have a list of all your credit card debts. Add up the total amount due and the total monthly minimums. Your certified credit counselor and other financial advisors are going to want to know how much you owe on how many cards, the interest rates, and what you have to pay each month just to cover minimums.

But that isn't the end of your debt situation. You probably have some other kinds of loans. If you took out an in-store loan to buy furniture, electronics, repairs, or that sort of thing, get out those papers. Count student loans and car loans here. Write down what each one is, how much you owe, the interest rate you're paying, and the minimum payment. Some of these loans may not have a monthly minimum or maximum, there is just one set amount to pay each month. Write down that amount as the minimum.

Again, add up the total amount you owe, the total minimum payment, and note how many of these there are. If you have questions or can't get the right information for this exercise, call your creditor. They hire people to be on call to answer these exact questions.

If you own a house, enter your current mortgage payment separately. For the mortgage, list how much you still owe, what you pay each month, the interest rate, and the term (how many years to pay off). List also the type of mortgage, that is, fixed rate (your interest is locked in) or adjustable. If you don't know, call the mortgage company.

That still isn't the end of it. You may have certain payments that come due every month that go automatically to your credit card. These can include monthly online services (like AOL or MSN), a gym membership, club dues, memberships to web sits or subscriptions, and even charitable donations. These are not "counted" as part of your credit card debt, because you get charged anew every month. Make a list of them: what they are, who you pay, how much you pay, the card they get charged to. If there are membership terms, note them (for instance, you may have signed up for a two-year gym membership, so you have to pay the gym fee for that length of time).

Again, total up how much comes in each month that you have pay.

Right now, you have three main categories of debt: credit card debt, loans, and monthly recurring fees.

Now you need to look at what it costs you to live. This is a bit harder to track exactly. If you have been living at your home for a while and your situation has remained relatively unchanged, just guess at these figures based on what you have previously been spending. If you're new, you have to make a reasonable stab at them. Write in your rent (if you don't own). If you do own your own house, write in your taxes and your insurance if they are not rolled into your mortgage payment.

Next put in utilities: water, garbage, sewer, gas, electricity. Be sure to count all of your phones (most of us have several). I would put cable TV here, too, if you have it.

Then you have to figure out what you pay each month for car insurance. If your insurance bills monthly, that's great. If you get bills quarterly or less frequently, calculate how much you pay in a year and divide by 12. If you pay your own health insurance, life insurance, flood insurance, or other insurance, put it here, too.

Then you have consumable stuff. Figure out how much you pay for gasoline each month and how much you spend for food, toiletries, and other disposable products (like garbage bags, paper towels, etc.)

You should also consider what you spend on services. Do you have somebody cut your hair? What about car repair? Home repair? Manicures and other treatments? What do you pay for childcare? Does somebody cut your lawn? How about dry cleaning? Car washes? Your goal is to find out what you pay each month. If you get your hair cut and colored every six weeks for $80, you can figure you go 9 times a year. That means you spend $720 a year on cut/color (9 x $80), which when divided by 12 results in $60 a month.

Figure out everything you pay. This part of the exercise may actually take a few days since most of us aren't really aware of all the financial hits we take. Do you pay school tuition? Do you regularly spend money on a prescription or non-prescription medications? What is a reasonable guess at how much you'll spend next year on the doctor and dentist and other healthcare practitioners? Do you pay for special classes or instructions (piano lessons, tumbling classes)?

Estimate what you pay for clothing, entertainment (movie visits, DVD rentals), and vacations or trips. If you entertain, figure those costs in as well.

Last, anticipate any changes in your plan. For instance, if your youngest child is going to go to school next year, you can delete costs for child care arrangements this year and guess at what you'll be spending next year for kindergarten.

Now you have a bunch of lists. You have credit card debts, other debts, automatically recurring payments, other debts (car notes, etc.), mortgage (if you have one), monthly living expenses and anticipated other expenses.

Calculate the monthly amount you need to cover all of these things each and every month. Now look at your net income from all sources. Does it cover it? If not, you have a serious problem. That problem means that every moment that passes just creates more debt for you!

These are the numbers you will need for your certified credit counselor. But before you go that far, you can actually do some things to help prepare yourself (and make yourself better).

Look at all that money you owe. Is there anything you can cut out without too much pain? For instance, can you cancel a subscription or membership easily? Can you live without the lawn guy? Are you willing to wash your car yourself to reduce your debt?

Look at other things that you may be able to roll back a bit. Do you really need a biweekly pedicure? Can you cut back on the number of phones you have or switch to a cheaper calling plan? Are you getting the best deal on car insurance? Can you reduce your light bill? Do you need the super deluxe cable TV package? (Do you even need cable TV?)

Cleaning this stuff up and off your list before you meet your certified credit counselor is a great first step. It shows you're serious and it shows you're in control and want to regain financial health. It also reduces your expenses, which is something most people in debt desperately need.

Now look at the credit card debts you have and the other debts you're carrying (student loans, furniture loans, etc.) When your certified credit counselor starts talking about consolidation, these are the debts that can get consolidated.

Your certified credit counselor may be able to help you re-package these debts in a way that reduces your overall burden. If you own a home, a refinancing option can be the most effective (and least painful) way to consolidate your debts.

Now before you start doing your happy dance, there are some important cautions. Debt consolidation with a refinance means that you will be paying off these debts for the next 30 years. Add 30 to your current age and youíll find out how old youíll be by the time you paid off the plasma TV you just bought on credit. Lots of people who do debt consolidation end up paying for stuff for years after the merchandise has worn out and been tossed. Youíre taking a long-term way out.

Second, although debt consolidation will probably put some money in your pocket in the short run, youíre not going to get financial freedom if you just squander your new found bucks on more luxury items. If your idea of debt consolidation means youíll be taking your extra money and buying a jet ski, youíre not going to get out of debt.

You also have a limit as to what you can consolidate. You canít reasonably expect to be able to consolidate your debts every two or three years. Ideally, this is an extreme once or twice in a lifetime kind of measure, not a lifestyle.

Donít consolidate your debts without a realistic escape plan. That escape plan should include:

        Avoiding future debt; practice a pay-as-you-go policy

        Economizing in meaningful ways so that you start to save

        Paying cash for major purchases as much as possible

        Learning some basic financial moves (saving, investing)

        Developing financial discipline so that you donít go in debt over things you donít need or even really want

But right now you can see that debt consolidation is a viable strategy that could help you reasonably and realistically get financial freedom.

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