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Debt Consolidation Loans Don’t Work (But You Might Get it to Work For You!)

wallet-squeeze instead of debt consolidationYou’ve likely heard or seen the commercials that urge you to consolidate your debt into “one low payment”. The concept makes logical sense and promises to free up some cash so it is easier to live paycheck to paycheck. The reason this usually doesn’t work is that it doesn’t address the real problem. The reason we get into this mess is because we have not learned how to spend within our income. What we need is a method to manage and organize our money so we make conscious decisions about how we spend it. A good book that I’ve used is “Your Money or Your Life” by Joe Dominguez.

How to Get Started

To get started you might try the following:

  1. Make a commitment to either never charge anything on a credit card, or that you’ll only charge an amount that can be paid off each month, in addition to the minimum payment on your accounts. This can be difficult to undertake, but not impossible. This is the only tried and true method for eliminating the debt problem. I recommend using cash only until you have your spending habits under control.
  2. Get a small notepad to put in your pocket or purse and write down each time you spend money and what it was spent on. This will help you track what you did with that extra cash you pull out of the ATM. Even small purchases like a cup of coffee should be accounted for. Account for any cash and credit spending in this manner.
  3. At the end of the month (or week) consolidate your spending information into categories that are meaningful to you. You might have categories for auto (fuel, repairs, insurance), groceries, debt repayment (credit cards, loans), entertainment (cable tv, newspapers, books, movies, dining out), utilities (electricity, phone, water, gas), household (lawn, garbage disposal, repairs), pets, personal grooming, clothing, and other categories.
  4. Organize the categories in the following groups:
    1. Monthly Required Spending (things like utilities, groceries)
    2. Monthly Discretionary Spending (entertainment, lunches)
    3. Periodic Required Spending (homeowner’s insurance, taxes)
    4. Periodic Discretionary Spending (clothing, manicures)
  5. Review your spending and establish funding amounts for your discretionary categories. With this step you’ll set limits for each discretionary category that fits within your available income. You should also review your required spending categories to determine if there are ways to reduce some of these amounts that you spend regularly. For example, you might review your auto and homeowner’s insurance policies to see if you can reduce these by increasing the deductibles.
  6. If you have any money left over, you should consider additional debt payments or placing some money into an emergency savings account. For the additional debt payments, organize your paydown using a debt snowball method – where you choose one account to concentrate your extra payments on, paying it down to zero. Then add the amount you’ve been paying on that account to the next account in your list, paying that debt down to nothing. Keep doing this until you’ve eliminated all debt. I suggest concentrating the extra payments on credit cards and personal loans with high interest rates first, then lower rates, followed by auto loans, student loans, and lastly your home mortgage.
  7. Label separate envelopes with each of the categories and place the appropriate amounts of cash in them. Some envelopes will accumulate cash month-to-month. For instance, your clothing envelope will gradually build up until you actually make that trip to the mall. Likewise, if you have an envelope for homeowner’s insurance and it’s only due twice a year, this envelope will accumulate cash until you need to make a payment, 1/6 of the necessary payment every month.
  8. Only use cash from the appropriate envelopes to pay for discretionary items. This will help you be less impulsive when you spend money.
  9. When you see the need to borrow from one envelope to pay for another category, make a note right on the envelope and pay back the borrowed amount as soon as possible.
  10. At the end of the month, make adjustments to your spending plan and envelope amounts to match your experience.

This process may seem very time-consuming, but outside of keeping track of your spending on the notepad and using the envelopes the process of establishing a funding plan and making adjustment should only take one evening and eventually only an hour or so a month. If you are married you will want to both commit to this as you get started.

Alternatively you could bypass the cash envelopes and keep your cash in a bank account, using a spreadsheet or a product like Quicken to segregate the funds. This method requires the mindset of an accountant, so that you can maintain the separation of the funds as if they were in separate envelopes for spending. Using accounting instead of envelopes can be a bit more difficult to maintain but you don’t have the cash sitting around. You’ll get used to it soon and will be a regular bean-counter before you know it.

If you use the envelope method I’d suggest investing in a small home fireproof safe to store the envelopes. Having all of your spending cash in your home could prove to be foolhardy otherwise.

By following this process you should have your spending habits well in hand in no time, which is the root of the debt issue. As you get a handle on your finances, you’ll soon be in the position to put your debts to rest – and with this discipline you’ve developed, a debt consolidation loan might work wonders! Only after establishing the disciplined process should you consider debt consolidation.If you need more information on debt consolidation please visit


  1. Anne (George's daughter) says:

    Hi Jim: I really enjoyed reading your article: I have coincidentally been using “the envelope method for some time; as did my Father: (ie. giving me “small cash”) my tip is: “make mailing labels on your envelopes with your name and address”; this way if anyone does find any envelopes; they will know whose money this is: my Father’s other tip: when carrying cash: always put a $1 bill on top of the “stack”; this way anyone who sees your money will think you are carrying only “singles”!!!
    summary: label your envelopes and “never…flash your cash”! thanks George! Anne

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