This is the problem with debt consolidation

 

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It’s not a math problem. The numbers on debt consolidation actually sometimes make sense. Credit cards (for instance) offer high interest rates because they’re unsecured, personal lines of credit. The most popular consolidation loans are home equity loans which offer much lower interest rates because they’re secured against your home. If you stop paying a credit card, the debt goes to collections and the credit card company receives pennies on the dollars that you owe them, their risk is high and you pay for it. If you stop paying a home equity loan, the bank has a stake in your house and they can sell it to get their money back (foreclosure), their risk is much lower and you pay less for it. So that all makes sense, isn’t it an obviously beneficial move to slide the debt from unsecured credit cards with high interest rates into a secured home equity line with a low interest rate?

Like I said, the math may sometimes make sense on paper (may, although there are some serious issues with home equity loans which offset the juicy interest rates), but the math was never the issue. We need to consider the root of the problem. If the root of the problem is that you’ve got high interest rates on credit card debt then a consolidation loan solves the problem; done, easy. Unfortunately, that’s not the root problem. The root of the problem is that you’ve got a broken relationship with money and things. You buy things because you want them and you worry about where the money will come from later. You use credit cards because, points (obviously), and they make you feel like lots of little purchases are no big deal. Your financial life lacks intention, there’s a disconnect between your purpose/values, and your money/spending. A consolidation loan is appealing for the momentary relief it could provide, your monthly debt payments might be cut in half, but it’s only a bandaid. Without a more fundamental change to your relationship with money and your spending habits, the consolidation loan will actually only end up causing more debt and more pain in the future.

Home equity loans (again, the most common type of consolidation loan) are usually interest-only loans, which means if you make the minimum (interest-only) payment each month, the debt could continue on into eternity. The lower interest rate is not helpful if the debt isn’t going down. People often end up paying far more interest on a low-rate equity loan than they would have by aggressively paying off a credit card.

A debt consolidation loan will wipe out your credit card balances leaving lots more room to spend. Without a change in the deeper issue (your relationship to money), you’ll just end up with the old credit card debt in the consolidation loan and new credit card debt on the credit cards. It’s a wicked spiral.

So don’t play the debt games. Credit cards aren’t necessarily the enemy, but using them without having the cash to back your purchases, that’s a problem, a problem that the best consolidation program in the world can’t solve.

Pain of discipline vs pain of regret

 

clem-onojeghuo-5AkJFdDDNKg-unsplash.jpgThis is a little quip I ran into a few weeks ago on a podcast. It was a quick throw-away line, but upon further thought, it’s actually pretty profound. We run into pain and discomfort all the time, especially when we set out to accomplish something. It’s painful to hear the alarm going off at 5am, even more painful when you remember your alarm is going off so that you can wake up and hit the gym. It’s painful to call through that list of people who may or may not remember who you are, even more painful when you realize most of them don’t care. It’s painful to order non-milk-and-sugar-filled coffee drinks at your favorite coffee place because, you know, calories (do yourself a favor and don’t compare the calorie count of plain coffee and flavored lattes). It’s painful to learn a brand new skillset. It’s painful to bump up the dumbbell weight or add a mile to your run. It’s painful to block out time to write (my precise problem this morning).

I can’t speak for you, but my track record in dealing with these pain points is less than stellar. Often times I find myself wasting time avoiding pain, or settling for an easier path instead of attacking the pain. The issue is, when I avoid the pain of good things today I’m necessarily inviting the future pain of regret. There are a couple of things going on when I submit to my pain aversion: 1) I get stuck, it’s really hard to make progress without any pain. 2) I sacrifice integrity, whenever I don’t do what I say or even intend to do I’m out of integrity. 3) My identity changes, instead of a person who follows through I become a person who gives up. Tied up in all three of those is regret. If I can’t help myself when faced with tempting food, I’m going to hate looking in the mirror. If I never embrace the discomfort of making phone calls or block out time to write, I’ll face the severe regret of a fruitless career.

So which is worse? Embracing the pain of discipline or succumbing to the pain of regret? There is a right answer.

I’m not sure the art of discipline will ever get a lot easier, but it can’t hurt to recognize that the pain of discipline is about a million times better than the pain of regret.