When Is It Wise to Refinance?

Karen asks if it would be wise to refinance and add her current debt to the total. Dave says no way.

QUESTION: Karen in New York asks if it would be wise to refinance and add her current debt to the total. Dave says no way.

ANSWER: Not unless it’s to avoid bankruptcy. We have found—in all the years of doing financial coaching—that debt consolidation is a con. Putting all of your debts together and putting them as a lien on your home is a dumb plan because now you put your home at risk for the steak dinner you ate last week that’s on your credit card. You need to instead deal with the problem. The problem is not the debt; the problem is the person in your mirror that keeps spending.

You need to quit spending like you’re freaking in Congress. You need to get on a written plan, take two extra jobs, don’t see the inside of a restaurant unless you’re working there as your extra job. Beans and rice, rice and beans, scorched earth on your lifestyle. List your debts smallest to largest, pay minimum payments on everything but the little one, and attack the little one with a vengeance. Sell so much stuff the kids think they’re next. Name the dog eBay. Put the cat on Craigslist. Attack that smallest debt. When that debt is gone, then you attack the next one down. When that debt is gone, then you attack the next one down. Every time you pay off one of those debts, you don’t have that payment anymore.

There’s a direct correlation between the speed you get out of debt and how pissed off you are. Stupid has an orbital pull. It has a gravitational pull. If you’re going to break the gravitational pull of stupid, you have to get passionate about it. You have to go nuts. You have to go crazy. And here’s the first hint: You can’t borrow your way out of debt. You can’t dig your way out of a hole. You’re in a hole. When you dig out the bottom, all you find is the other side of the earth ... eventually.

You can’t keep doing what you’ve been doing. You have to change your habits, and the more dramatically you change your life and change your habits, the more dramatically you get out of debt—the faster you get out. The ratio of your income versus your debt—the shovel you have to the size of hole you’re in—is going to tell you how quickly you’re going to get out. Interest rate is not your problem. It doesn’t change the math at all to have one payment on the exact same amount of debt with the exact same interest rate as it does 10 payments on this exact same amount of interest on the exact same amount of debt. It’s the exact same math. Exact. It doesn’t change it one penny.

“I have all these payments. They drive me crazy, so I just want one.” So what you’re going to do is you’re going to take that 0% interest medical bill, and you’re going to put it on a 14% second mortgage where you got ripped off at the storefront finance company who’s more than happy to help you with prepayment penalties. I don’t call that beneficial.

So instead, we’re going to work a plan. We’re going to cut deep, and we’re going to get rid of this mess fast. The average family that gets really ticked off and says, “I’m out of here,” is paying off all of their debt except their home within about two years. Eighteen months to two years, somewhere in there. That’s the average. And you people with $180,000 in student loan debt—you mess up the average. It’s going to take you a while. But you people that have got $3,000 in debt and $6,000 in the bank—just write a check, son. What are you playing with this for? You help us with the average, so the average is 18 months to two years for you to get everything knocked out. But that’s only if you’re so fired up that your broke friends are making fun of your financial plan. If broke people aren’t making fun of your financial plan, you are not on track. It’s just like if fat people aren’t rolling their eyes at your diet, you are not on track if you want to lose weight.

You’ve got to decide. This is how you do it, but you can’t borrow your way out of debt. Eighty-eight percent of the people borrow money to put all of their other debts on, and they do a debt consolidation, don’t change their habits, and go back into debt. Oh! Wait a minute. They didn’t get out of debt the first time, so now they’ve got double debt because you say stupid things like, “Oh, I paid off all my debt with a second mortgage.” You didn’t pay off your debt; you moved your debt. It’s still there. It just has a new name, but it makes you feel like you did something, and so you don’t do anything to change your life. That’s how this debt snowball thing works. That’s how this get-out-of-debt thing works. And it does work when you work it that way.

But there’s no math trick. There’s no little pill you can take. There’s no 1-800 number that you can dial. “1-800-I’m-Going-To-Make-This-Easy-For-You-To-Get-Out-Of-Debt. You won’t have to work. You’ll feel no pain.” See, people want to dial those 1-800 numbers, don’t they? You know why that stuff’s on midnight cable? Because at midnight after you’ve been up all day, your brain isn’t working real good, and that’s when you dial crap like that. They don’t put it on in the middle of the day when your brain’s working. You wouldn’t fall for that crap if you weren’t desperate. Don’t fall for it.