Core Financial Concepts

Debt Consolidation

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A major obstacle to a sound financial future is consumer debt. That is why it's important to have a strategy that helps reduce and eliminate it!

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Give up a small luxury! Try it at least once a month and put the money you would have spent toward your credit card debt. This small sacrifice can make a big difference in the long run.

 

For example:

• Suppose you owe $1,500 on a credit card and the interest rate you're charged is 18%.

• If you take a minimum payment of $37 per month, you would pay off your debt in 63 months. But if you pay $47, you'll pay it off in 44 months and save $272 in interest.

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Remember that the Rule of 72 can work for you or against you! This concept can show you how your money can double in savings. It can also demonstrate the approximate amount of time it takes for your debt to double at a constant rate of return compounded over time.

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This example shows how it works:

• Mary owes $10,000 on a loan, and the interest rate she's charged is 12% per year compounded annually.

• If she doesn't make any payments, at this interest rate it would take 6 years for the amount she owes to double.

• The Rule of 72: 72÷12=6

• Rule of thumb: pay down debt quickly. And, make sure extra payments are applied to the principal.

 

• Click here to watch the Rule of 72 video by WFG.

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Want to pay down debt more quickly?

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Then debt roll-up, also known as the snowball method, may be the strategy for you. Getting started is easy - simply:

 

• Commit to stop borrowing.

• List all your debts in order of amount, from those with the lowest to the highest balance, or by interest rate, from highest to lowest.

• Pay more than the minimum payment each month on Debt 1 payment to each of Debt 2's minimum monthly payments, while continuing to make the minimum monthly payments on your additional debts.

• Repeat the process until all your debts have been paid.

 

You'll get on a roll and pay off your debts faster. After one is fully paid off, you'll have the momentum and cash flow to tackle the rest. If you focus on paying off the balance with the highest interest, you will pay off your debts with a lower total amount of interest paid.

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• Want to Pay Off Debt Quickly? Stack It! video by WFG.

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When basic debt management strategies are not enough, consider debt consolidation!

 

Paying more than the minimum payment and using a debt-rollup strategy can help eliminate debt. But sometimes you need to make a power move: debt consolidation which is a form of debt refinancing in which you take out one loan to pay off many other loans, especially high-interest consumer debt.

 

Debt consolidation can make managing your debts easier because it eliminates the number of creditors to pay each month. It also enables you to obtain an overall lower interest rate on your debt, so you can start working on other financial goals sooner.

 

Here are two ways people consolidate their debts:

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• Enter a debt consolidation program: many nonprofit companies provide this service. They reach out to your creditors and arrange for you to make one payment of the debt consolidation organization, which is the used to pay your creditors. As part of their service, you get credit counseling that can help you manage your finances.

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• Debt consolidation loans: if you have a decent credit score and/or collateral such as a home, you may be able to get a debt consolidation loan. Your lender will either use the funds you've borrowed to pay your debts to each creditor, or deposit the funds into your bank account, so that you can then pay off the debts with the loan proceeds.

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