Financial Churning...

The other day, a friend of ours told us she received a debt consolidation advertisement in the mail promising to cut her debt payments in half. Our friend has a spending and debt problem, so she was hopeful this might solve it. She said all she had to do is sign a contract, move her debt to this company, pay $600 a month, and they will take care of everything. Unfortunately, this made me think about Financial Churning.

Financial churning is moving money in the attempt to either make or save money without ensuring that it actually will. In a lot of cases, it ends up costing more money.

The term is derived from the brokerage industry, where stock brokers excessively trade a client’s account just to generate additional commissions; sometimes with the permission of the client who thinks each trade translates into more money, which it often doesn't. So its important to keep in mind...

”Never confuse motion with action.”

Benjamin Franklin's quote suggests that just because you’re moving; doesn't mean you're moving in the right direction. Simply moving money around because you're deeply distraught and desperate to get out of debt may not solve your problem. It actually might make it worse. Staying put may be the best option. But you won't know that unless you...

Do the Math.

To avoid financial churning, make sure your decision either makes or saves you money by doing the math. With a debt consolidation contract, consider the:

• Interest rate
• Interest rate terms (adjustable or fixed)
• Term (length) of the loan
• Total Amount owed at the end of the term
• Collateral obligations
• And the terms of default

Taking an hour to run the numbers in excel might save you thousands of dollars down the road.

Stay frosty people. Thanks for reading.

Credit for Images:
https://commons.wikimedia.org/wiki/File:Jean-Fran%C3%A7ois_Millet_-Young_Woman_Churning_Butter-66.1052-_Museum_of_Fine_Arts.jpg