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Dave Says: Getting out of debt requires changing habits, new behaviors

Dear Dave,

My wife and I made a resolution this year to pay off $20,000 in credit card debt we’ve accumulated. I want us to follow your plan, and live on a really tight budget. She wants us to use a debt consolidation company, like some of her friends have done. I’m really against her idea, but how can I change her mind?

Blake

Dear Blake,

I’m glad you two have made the decision to get out of debt, and gain control of your finances. When it comes to this sort of thing, it’s wise to remember there’s no magic pill. No debt consolidation company is going to get you out of debt and help you stay out of debt. The answer is learning how to control yourself and your behavior with money.

Using a debt consolidation company seems appealing, because there’s usually a lower monthly payment or lower interest rate attached. The problem in most cases, however, is the lower payment or interest rate exists only because the term is extended. You might pay a little less each month, but you end up staying in debt longer.

There are other problems involved in using debt consolidation companies, too.  For one thing, it can trash your credit for a long time when it comes to buying a car or a house. For these reasons I sometimes refer to it as a CON-solidation, because the whole thing is basically a con. They make you think you’re really doing something about your debt problem, but the debt—and all the bad habits that caused it—are still there. 

My guess is your wife’s friends think using a debt consolidation company is an easy, harmless way to get out of a financial mess. But sometimes you’ve got to be an adult, admit the mistakes you’ve made, and do what it takes to straighten things out. This kind of thing isn’t a math issue. It’s a behavior issue. Making the decision to get out of debt and never go back there again, by living on a really tight budget and making sacrifices, is the best way to fix this mess and learn a lesson in the process.

Live like no one else, so that later, you can live—and give—like no one else. Stay away from debt consolidation companies, Blake. Doing this the right way is worth it!

—Dave

Keep it small, and budget for it

Dear Dave,

I’m trying very hard to get out of debt. I have my beginner emergency fund in place, and I’m living on a monthly budget. Is it okay to include a little wallet cash in my budget at this point, just in case?

Andrew

Dear Andrew,

It’s probably not going to throw you off too much in terms of getting out of debt if you budget $20 or so, just to have some cash in your wallet. I wouldn’t recommend much more than that, though. The idea of having $50, $100, or $200 in walking around money is pretty self-defeating when you’re supposedly saving, budgeting, and working hard to get out of debt.

What really matters is the amount of pocket money you allow yourself to have.

Think of it as a safety valve. Sometimes things come up in the course of day-to-day life that are just necessary, unexpected expenses—but not emergencies. Just designate a small amount of cash for it as part of your regular, monthly budget, and stick to that amount!

—Dave

Emergency fund first, then investing

Dear Dave,

Do you think I should stop making contributions to my 401(k) for a year, so I can save up an emergency fund? I’m 28, and debt-free, but I don’t have anything saved for emergencies.

Bryan

Dear Bryan,

If you’re debt-free and making decent money at your job, it shouldn’t take a whole year to set aside an emergency fund. Just make it a priority in your monthly budget. And yes, my advice to you is temporarily stop making contributions to your 401(k) until you have a fully-funded emergency fund of three to six months of expenses.

I recommend people stop investing, or wait to start investing, until they are debt-free except for their home and have a fully-funded emergency fund in place. In some cases, depending on how much debt they have, it can take two or three years to do all this. I know that seems like a long time, but in the grand scheme of things it’s really not.

If you don’t have an emergency fund, but you’re contributing to a 401(k), there’s a good chance you’ll end up cashing out your 401(k) if a large, unexpected expense comes along. Then, when you cash out a 401(k) early, you get hit with a penalty plus your tax rate. That’s not a wise plan!

—Dave

Dave Ramsey is CEO of Ramsey Solutions. He has authored seven best-selling books, including The Total Money Makeover. The Dave Ramsey Show is heard by more than 16 million listeners each week on 600 radio stations and multiple digital platforms. Follow Dave on the web at daveramsey.com and on Twitter at @DaveRamsey.

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