debt-empty-pockets

Each week, we look at the ABCs of cash flow management.

U is for Unification

At The Money Finder, we don’t use the term “consolidation” when talking about people’s debts. It’s an accurate description of what happens when someone combines debts, but there are too many negative preconceptions attached to the term.

As such, we drop that word from our vocabulary when proposing a client change her debt structure during the cash flow planning process.

Debt consolidation refers to a situation where someone takes out one single loan to pay off many existing loans. That client may lower her interest rate or secure a fixed interest rate by doing so, as well as lower the monthly cost of her debt servicing.

The latter result is the real driving force behind consolidation for many people. The problem, though, is paying lower debt costs each month can cause more long-term pain.

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That’s because that client would likely have to stretch the terms or amortizations of her loans to get lower monthly payments. And doing that ends up boosting total interest costs over the lifetimes of loans. As well, that client wouldn’t be inspired to change her spending behaviors when only focused on lowering short-term costs.

As such, many people who consolidate debts end up boomeranging right back. Some even need to consolidate repeatedly, which places them on an endless debt treadmill.

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That can happen to all types of clients since some people decide to combine debts to simply free up cash flow. As well, some are lured by the prospect of lower interest rates. However, without a cash flow plan that helps them track repayment goals and use savings effectively, debt consolidation won’t have much of a long-term impact.

We prefer to use the term “debt unificationduring cash flow planning discussions, especially since clients don’t have preconceived notions of what that term means. We explain that, when unifying debts, our aim is to combine all consumer or personal debts into as few accounts as possible, and to help them pay back debt as quickly as possible.

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Ideally, we like to combine all debts into one single account, but we first consider all repayment factors. If moving to one account is the best option, we’re then able to focus repayment efforts on that single account in an automated fashion. Also, we track clients’ repayment progress based on their written cash flow plans.

Your main goals should always be to help people: pay down principals as quickly as possible; save thousands in overall total interest costs; and free up monthly cash flow.

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Do you see the difference between the two terms? You need to use the right one since it’s hard to teach clients to attach new meanings to old and overused words. If you introduce new terms, you’ll be able to better frame discussions.

To encourage people to do more than chase lower monthly debt payments, introduce detailed cash flow plans and thoroughly explain why debt unification will help clients meet their goals as efficiently as possible.

Continue on to letter V.

Stephanie Holmes-Winton is a Halifax based financial services educator/speaker who helps advisors find the money to help their clients fund their financial plans. She is the author of Defusing The Debt Bomb & $pent. Stephanie is also the founder and board chair of the Certified Cash Flow Specialist™ designation program. You can reach Stephanie at sholmes@themoneyfinder.ca or themoneyfinder.ca
Originally published on Advisor.ca

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