Saving Money While in Debt Consolidation: How to Do It

Debt consolidation is a process of combining multiple debts into one single payment with a lower interest rate. It can help people manage their debts more easily and pay them off faster. However, debt consolidation is not a magic solution that will make your debts disappear overnight. You still need to be responsible with your finances and find ways to save money while in debt consolidation. In this article, we will provide you with some tips on how to do that.

Tip 1: Compare different debt consolidation options and choose the best one for your situation

There are different ways to consolidate your debts, such as using a balance transfer card, taking out a personal loan, or tapping into your home equity. Each option has its own pros and cons, so you need to compare them carefully and choose the best one for your situation. Some of the factors to consider when comparing debt consolidation options are:

• Interest rate: The lower the interest rate, the less you will pay in interest over time. Look for debt consolidation options that offer low or zero interest rates for a certain period of time, such as balance transfer cards or introductory offers.
• Fees: The fees associated with debt consolidation can vary depending on the option you choose. Some fees to watch out for are balance transfer fees, origination fees, closing costs, or prepayment penalties. Make sure you factor in these fees when calculating the total cost of debt consolidation.
• Repayment term: The repayment term is the length of time you have to pay off your debt consolidation loan or balance transfer card. The longer the repayment term, the lower your monthly payments will be, but the more interest you will pay in total. The shorter the repayment term, the higher your monthly payments will be, but the less interest you will pay in total. Choose a repayment term that fits your budget and your debt payoff goals.
• Credit score: Your credit score can affect your eligibility and interest rate for debt consolidation options. Generally, the higher your credit score, the better your chances of getting approved and getting a lower interest rate. However, some debt consolidation options can also affect your credit score negatively, such as applying for multiple loans or cards, closing old accounts, or missing payments. Be aware of how debt consolidation can impact your credit score and take steps to protect it.

For example, let’s say you have $10,000 in credit card debt with an average interest rate of 18%. You have two options to consolidate your debt: a balance transfer card with a 0% interest rate for 12 months and a 3% balance transfer fee, or a personal loan with a 10% interest rate for 36 months and a 5% origination fee. Here is how they compare:

• Balance transfer card: You will pay $300 in balance transfer fees upfront, and then $833.33 per month for 12 months to pay off your debt. You will pay $0 in interest and save $1,800 compared to your current situation.
• Personal loan: You will pay $500 in origination fees upfront, and then $322.67 per month for 36 months to pay off your debt. You will pay $1,616.12 in interest and save $182.88 compared to your current situation.

As you can see, the balance transfer card offers a lower interest rate and a shorter repayment term, but it also requires a higher monthly payment and a higher upfront fee. The personal loan offers a longer repayment term and a lower monthly payment, but it also charges a higher interest rate and a higher upfront fee. Depending on your preferences and circumstances, you may choose either option as the best one for you.

Tip 2: Negotiate with your creditors and ask for lower interest rates or waived fees

Another way to save money while in debt consolidation is to negotiate with your creditors and ask for lower interest rates or waived fees. This can help you reduce the amount of debt you owe and make your payments more affordable. Here are some tips on how to negotiate with your creditors effectively:

• Be polite: When contacting your creditors, be respectful and courteous. Explain your situation and why you are struggling to pay off your debt. Express your willingness to cooperate and find a solution that works for both parties.
• Be honest: Don’t lie or exaggerate about your income, expenses, or assets. Provide proof of your financial hardship, such as pay stubs, bank statements, or bills. Don’t make promises you can’t keep, such as paying a certain amount by a certain date.
• Be realistic: Don’t expect your creditors to agree to your requests right away or to offer you a huge discount. Be prepared to negotiate and compromise. Start with a reasonable offer and work your way up or down until you reach an agreement that you can afford and that your creditors can accept.
• Be persistent: Don’t give up if your creditors reject your initial offer or don’t respond to your calls or letters. Follow up with them regularly and keep track of your communication. If possible, speak to a supervisor or a manager who has more authority to make decisions.

For example, let’s say you have a credit card debt of $5,000 with an interest rate of 20% and a minimum payment of $125 per month. You can call your credit card company and ask them to lower your interest rate to 15% and waive the late fees you incurred in the past. You can say something like this:

“Hello, my name is John Smith and I have been a loyal customer of your company for over 5 years. I am calling to request some assistance with my credit card debt. Due to some unexpected medical expenses, I have been having difficulty making my payments on time. I currently owe $5,000 on my card with an interest rate of 20%. I would like to ask you to lower my interest rate to 15% and waive the late fees I incurred in the past. This would help me pay off my debt faster and avoid further damage to my credit score. I appreciate your cooperation and understanding.”

If they agree to your request, you will save $1,250 in interest and $150 in late fees over the course of paying off your debt.

Tip 3: Create a realistic budget and stick to it

Creating a realistic budget is essential for saving money while in debt consolidation. A budget can help you track your income and expenses, identify areas where you can save or cut costs, and allocate money for your debt payments and other financial goals. Here are some tips on how to create a realistic budget that suits your needs and goals:

• Use apps, tools, or templates: There are many apps, tools, or templates that can help you create a budget easily and conveniently. Some examples are Mint, YNAB, or Google Sheets. These tools can help you track your income and expenses automatically, categorize them into different groups, and provide you with reports and insights on your spending habits and patterns.
• Be realistic: Don’t set your budget too high or too low. Be honest with yourself about how much you earn and how much you spend. Don’t forget to include irregular or variable expenses, such as gifts, vacations, or car repairs. Don’t rely on unrealistic assumptions or expectations, such as getting a raise, winning the lottery, or inheriting money.
• Be flexible: Don’t treat your budget as a rigid rule that you have to follow at all costs. Allow yourself some room for adjustments and changes. For example, if you spend more than you planned on groceries one month, you can try to spend less on entertainment or clothing the next month. If you have an unexpected income boost, you can use it to pay off more debt or save more money.
• Be consistent: Don’t create a budget and then forget about it. Review your budget regularly and update it as needed. Compare your actual income and expenses with your planned ones and see if you are on track or off track. Celebrate your achievements and learn from your mistakes.

For example, let’s say you have a monthly income of $3,000 and a monthly debt payment of $500. You can create a budget that allocates 50% of your income for your needs, 30% for your wants, and 20% for your savings and debt payments. Here is how it might look like:

• Needs: $1,500
  • Rent: $800
  • Utilities: $100
  • Groceries: $300
  • Transportation: $100
  • Insurance: $100
  • Health care: $100
• Wants: $900
  • Entertainment: $200
  • Dining out: $200
  • Clothing: $100
  • Personal care: $100
  • Hobbies: $100
  • Gifts: $100
  • Miscellaneous: $100
• Savings and debt payments: $600
  • Emergency fund: $100
  • Savings account: $100
  • Debt payment: $400

Tip 4: Cut down on unnecessary expenses and find ways to increase your income

Cutting down on unnecessary expenses and finding ways to increase your income are two effective strategies for saving money while in debt consolidation. By reducing your spending and boosting your earning, you can free up more cash to pay off your debt faster and save more money for your future. Here are some tips on how to cut down on unnecessary expenses and find ways to increase your income:

• Cut down on unnecessary expenses:
  • Cancel subscriptions or memberships that you don’t use or need, such as cable TV, magazines, or gym memberships. You can save hundreds of dollars per year by doing this.
  • Eat out less and cook more at home. You can save money and eat healthier by preparing your own meals. You can also plan your meals ahead of time, shop for groceries in bulk, and use coupons or discounts to save more money.
  • Shop around for better deals on your bills, such as phone, internet, or insurance. You can compare prices and features of different providers and switch to a cheaper or better option. You can also negotiate with your current providers and ask for lower rates or discounts.
  • Avoid impulse buying and unnecessary shopping. Before you buy something, ask yourself if you really need it, want it, or can afford it. You can also set a limit on how much you can spend on non-essential items per month and stick to it.
• Find ways to increase your income:
  • Sell unwanted items that you don’t use or need, such as clothes, books, or electronics. You can sell them online, at a garage sale, or at a consignment store. You can make some extra cash and declutter your space at the same time.
  • Take on a side hustle or a part-time job that matches your skills, interests, or availability. You can offer your services online, such as writing, graphic design, tutoring, or data entry. You can also look for local opportunities, such as babysitting, dog walking, or delivery.
  • Ask for a raise or a promotion at your current job if you think you deserve it. You can prepare a list of your achievements and contributions and present them to your boss. You can also look for opportunities to learn new skills or take on more responsibilities that can increase your value and income.
  • Invest your money wisely and earn passive income. You can invest your money in various ways, such as stocks, bonds, mutual funds, or real estate. You can also create passive income streams, such as writing a book, creating a course, or starting a blog.

For example, let’s say you have a monthly income of $3,000 and a monthly debt payment of $500. You can cut down on unnecessary expenses by canceling your cable TV subscription ($50), eating out less ($100), and shopping around for a cheaper phone plan ($20). You can also find ways to increase your income by selling some of your unwanted items ($100), taking on a freelance writing gig ($200), and asking for a raise at your job ($100). By doing this, you can save or earn an extra $570 per month, which you can use to pay off more debt or save more money.

Tip 5: Set aside some money for emergencies and savings

Setting aside some money for emergencies and savings is important for saving money while in debt consolidation. Having an emergency fund and a savings account can help you cope with unexpected expenses, avoid taking on more debt, and achieve your financial goals. Here are some tips on how to build an emergency fund and a savings account:

• Save a percentage of your income: A simple and effective way to save money is to save a percentage of your income every month. You can start with a small percentage, such as 5% or 10%, and gradually increase it as you get more comfortable. You can also automate your transfers to your emergency fund and savings account so that you don’t have to think about it.
• Use apps or tools: There are many apps or tools that can help you save money easily and conveniently. Some examples are Acorns, Digit, or Qapital. These apps or tools can help you save money automatically, round up your purchases, or set rules or goals for your saving behavior.
• Use windfalls or extra income: Another way to save money is to use windfalls or extra income that you receive occasionally, such as tax refunds, bonuses, gifts, or inheritance. Instead of spending them on something you don’t need or want, you can use them to boost your emergency fund and savings account.

For example, let’s say you have a monthly income of $3,000 and a monthly debt payment of $500. You can save 10% of your income every month, which is $300. You can split this amount between your emergency fund and savings account, such as $200 for your emergency fund and $100 for your savings account. You can also use an app like Acorns to round up your purchases and save the change. You can also use a windfall like a tax refund of $500 to add to your emergency fund and savings account, such as $300 for your emergency fund and $200 for your savings account.

Conclusion

Saving money while in debt consolidation is possible and beneficial. By following the tips we provided in this article, you can reduce your debt, save more money, and achieve your financial goals. Some of the tips are:

• Compare different debt consolidation options and choose the best one for your situation
• Negotiate with your creditors and ask for lower interest rates or waived fees
• Create a realistic budget and stick to it
• Cut down on unnecessary expenses and find ways to increase your income
• Set aside some money for emergencies and savings

We hope you found this article helpful and informative. If you have any questions or comments, please feel free to leave them below. Thank you for reading and happy saving!