Why Is a HELOC a Bad Way to Pay Down Debt?

With the availability of easy credit and the popular “buy it now” mentality over the past several decades, many Americans are finding that their levels of credit card debt are spiraling out of control. A fairly quick and supposedly painless solution that is often proposed is for homeowners to take out a Home Equity Line of Credit, known simply as a HELOC. But is a HELOC really the solution to your credit card debt problem?A HELOC Puts Your Home At Risk
The number one problem that comes with taking out a HELOC to pay down credit card debt is that you will lose your home if you cannot keep up with the payments. That is a serious decision that cannot be taken lightly. Many families have traded in unsecured credit card debt for secured home equity debt, only to lose their home a short time later.It is almost always a very bad idea to take on secured debt to pay off unsecured debt.

Home Values And HELOC Interest Rates Fluctuate
Another problem with maxing out a HELOC is that property values and credit interest rates fluctuate with the ebb and flow of the economy as a whole. You could end up in a situation where your HELOC rate is going up while your home’s value is plummeting, leaving you owing more on your home than it’s actually worth.If you continue to face financial difficulties and need to sell your home as a last resort, you could actually have to pay additional money just to sell your home, and that is not a position you want to be in.Revolving Debt Is The Problem, Not The Solution
By now you’re seeing that there’s more to this decision than just comparing the interest rates on your credit cards to the interest rate on a HELOC. If those numbers were all you had to consider, then it would be simple decision.But the math doesn’t tell the whole story.To get yourself out of debt and back on financial solid ground, you need to ask yourself this key question: “Why am I in debt in the first place?”For most people who struggle with credit card debt, the answer is that their spending habits are what got them into trouble in the first place. If you have been living beyond your means for years on end and using credit cards every month to make up the difference, then a HELOC is probably not the solution to your problem. You are spending more money than you make every month, and nothing will change until you get that under control. You’ve got to stop the spend-pay-spend-pay cycle that revolving debt allows.

You need a solid cash flow and debt-reduction plan, but more importantly – you need the self-discipline to carry it out consistently for as long as it takes to get yourself free of debt.You will have to take aggressive action and significantly downgrade your lifestyle for the time being. That might seem a bit painful at first, and it’s going to require some compromise and tough conversations to build a consensus within your household, but those inconveniences are nothing compared to the pain that you could experience if you end up losing your home later on.Revolving debt in the form of credit cards got you into this mess, but more revolving debt in the form of a HELOC is not going to get you out of it.Make the hard choices. Make the difficult changes. Take control of your spending, grab a shovel and dig yourself out of this hole one day at a time.

Thirteen Elements of Effective Planning

All plans are not good plans. In fact, even good plans can fail. We cannot predict the future – we can only imagine it imperfectly. In our companies and organizations, effective planning is a social activity. Deciding on a strategic planning process as a group, rather than as an individual, adds even greater complexity to an already complex task. Collaborative and effective planning techniques, then, require 13 essential elements.

1. Effective and Strategic Planning Process

First, effective planning requires a process, and that strategic planning process should include the remaining 12 elements of good planning. In collaborative team planning, that process must be structured and disciplined in order to be efficient and thorough. Without a process, your planning techniques will be awkward, inefficient and often insufficient.

2. Effective Planning Techniques: An Envisioned Future / Objective

When we envision the future, we must describe it clearly and provide specific measurements in order to judge our success. To this end, the objective of our effective planning techniques is goal we envision attaining in the future. Objectives must be clear to all involved. They must also have a scope that is commensurate with the span of control of those involved with the effective planning process. An objective that is not achievable by those tasked with developing a plan is, obviously, doomed to failure. Objectives must also be measurable. Without measurements of success, there is no means of establishing whether or not the objective was achieved, and your strategic planning process will be flawed.

3. Dynamic, Adaptable Planning

In terms of effective planning, “dynamic” means that plans are adaptable, in two ways. First, the act of effective planning considers the current and predicted environment and adapts the plan accordingly. Second, in the strategic planning process, plans must be devised in such a way so that they are not overly detailed. Effective planning ensures that your plans can adapt to changes that occur while the plan is being executed.

4. Iterative Improvements

Effective planning at your organization will also be iterative. By “iterative,” we mean that a plan will improve continuously from one iteration, or version, to another before it is executed in the strategic planning process. The iterative nature of planning supports its adaptive or dynamic nature. Iteration can be sped up by an effective planning technique known as “Red Teaming.” In Red Teaming, a group of individuals outside the planning effort are invited to criticize the plan or expose its weaknesses, acting as a form of rapid iteration and improvement.

5. Effective Planning Requires that You Learn from Experience

A complex and rapidly changing environment demands the ability to rapidly learn from the changes in that environment. Even the most well-educated and trained organization will soon become obsolescent as changes in the environment eventually overwhelm it. Good organizational planning requires sophisticated and effective planning techniques that the organization learns continually, through interaction with its environment and the execution of its plans.

6. Means to Achieve / Course of Action

The central element of all effective planning techniques is the Course of Action (COA). These are the actual tasks that must be completed, whether in parallel, in series, or a combination of both, to achieve the goal. For the most part, in a strategic planning process, the Course of Action, for simple plans, is intuitive or even obvious. However, for most organizations, plans may require great detail. Therefore, an effective planning process must be flexible enough to handle both simple and detailed plans. Effective planning processes should have the ability to repeat the planning process at successively lower levels in the organization, while supporting the objectives of the overall plan.

7. Decentralized Effective Planning

Another effective planning technique is the decentralization of plans, closely related to the flexible and successively repeatable nature of the Course of Action. Effective planning teams should not plan beyond their scope or expertise. In other words, the executive team of a large corporation should not develop the details of a strategic planning process to replace a main server in their IT infrastructure. Such a task is both out of their scope and, most likely, their expertise.

8. Individual Accountability

The scope and detail of effective planning is concluded when each task within a Course of Action is assigned to a single individual, not a team, to complete. Without individual accountability to each task and each plan, there is a significant risk of miscommunication, misunderstanding, and ultimately, failure.

9. Effective Planning Techniques Support Initiative and Good Judgment

General George S. Patton said that plans “[...] should be made by those who are going to execute them.” Decentralization and accountability go far in supporting the success of effective planning techniques. However, when a strategic planning process is developed by the team responsible for accomplishing the plan’s objective, the overall quality and likelihood of creating a successful plan improves exponentially.

10. Consider Resources

Effective planning means not committing to or wasting resources unnecessarily. In a strategic planning process, planners must determine the appropriate targets or objectives and focus resources upon those objectives. Because resources are often limited, prioritizing and planning successive phases of implementation may be necessary.

11. Assess Risk: Leadership Responsibility

Resources are considered carefully at every level of effective planning. Furthermore, the assessment of objectives, threats and resources are critical steps in every strategic planning process that, when taken together, form the basic risk assessment for any plan. Without the necessary resources to either avoid or mitigate the threats to accomplishing an objective, the risks in undertaking that plan should be given due consideration by the leadership within the organization. Because risk is often necessary, the final decision to execute the plan is left to its leaders, not the planning team.

12. Participatory and Cognitively Diverse

Isolating planning in a single individual or a group of individuals without the benefit of field experience and a diversity of knowledge, skills, and abilities is a recipe for failure. The world we live in is increasingly complex. Problem-solving in our complex world requires teams of cognitively diverse individuals contributing their unique knowledge to form a combination of effective planning techniques. If planning is conducted by a single individual or by groups of people with similar knowledge, skills and abilities, the qualities necessary to solve complex problems and to create an innovative strategic planning process will be absent.

13. The Most Effective Plans are Simple

The more complex a design, the more likely it will fail. As Statistical Process Control and Six Sigma methodologies instruct, the greater the number of steps in a process, the greater the potential for a defect. That is why it is critical that the planning process remains simple. Simplicity is not just about minimizing the number of tasks, it’s about making sure that each task is clearly defined through answering some simple questions: “who will do what and when.”

There is a paradox at work in effective preparation. It is simply this: that our human tendency is to implement plans rigidly while the purpose of a plan, in light of the complexity and constant change in the world, is to define objectives and establish a point of departure to react to change. The paradox of the strategic planning process is that effective planning does not involve merely creating a list of sequenced tasks, but establishing a constantly evolving problem-solving process that adapts and thrives in the environment.