After Christmas giving comes post-holiday debt
The holiday season is here, and many of us have already blown through the money we've budgeted for gifts for our friends, relatives and co-workers.
Come the first of the year, the problem won't be spending money but paying off the debt we've been piling up in our jolly, holly daze.
“There are lots of reasons why people overspend during the holidays,” said Wendy Bennett, senior financial adviser and portfolio manager with Bennett Associates Wealth Management, 101 E. Diamond St., Suite 200.
“Maybe they're trying to relive the excitement of their childhood. Maybe they're trying to reciprocate the value of a gift given to them or they anticipate receiving from someone,” Bennett said.
“Or maybe as a parent they're trying to fulfill the wish list of each child during the holiday season,” she added.
But red ink doesn't always have to follow the reds and greens of Christmas.
First of all, advised Slippery Rock University business professor Abbas Noorbakhsh, start setting aside money now for Christmas 2017 so you don't find yourself deep in debt again next year.
“Usually the best way is to create a Christmas club account to set money aside. It sets a budget for gifts and you can stay in the limits of that,” said Noorbakhsh.
“You can go to your bank or credit union and set up an account where they can do an automatic withdrawal from your paycheck,” he said.
With a payroll deduction, Noorbakhsh said, a person can set aside $20 or $25 a paycheck automatically.
Then, stick to only paying cash from that account for next year's presents.
Noorbakhsh said in lieu of a Christmas club account, consider saving for different expenses by setting up separate checking or savings accounts and splitting earnings among them.
Sadly, according to Noorbakhsh, “Interest rates are so low right now, it doesn't matter if it's a checking or a savings account.”Laura Wiest, a member of the accounting faculty at Butler County Community College, said don't go charging into stores all willy nilly.“Start with a plan. I would start with what I know I can afford. Start with the money you know you have set aside, list the people you have to buy gifts for and figure out who gets what,” Wiest said.Bennett said set a specific dollar amount for each person and stick to it, or limit the number of gifts per person.Other options, Bennett said, include making gifts such as bread, cookies or ornaments or “going in” with other relatives on the cost of a gift.The worst thing consumers can do at Christmas time, said Noorbakhsh, is run up a large balance on a credit card and not pay it off at once.“To keep a balance on a credit card account is a great mistake,” he said. “In this cheap money era, you can get an unsecured loan without collateral at a rate of 5.5 or 6 percent to pay off a credit card balance whose interest is 14 to 15 percent.”“That's the most expensive way to borrow,” Noorbakhsh said. “I've had a credit card for 15 to 20 years and I've never paid a penny of interest because I pay my balance on time.”Wiest agreed.“I think we have a problem with credit cards in this country,” she said.In her family, she said, “We've used credit cards for years, but we subtract the amount we charge on a card from our checkbook balance.” That, way she said she keeps track of the total charged on a credit card and won't be surprised at the end of the month when the statement arrives.
“When we use the credit card to buy things, we are paying more than market value for something if we don't pay the balance off right away,” Wiest said.A $600 refrigerator is going to wind up costing a credit card holder more than $600 if he's carrying a balance — an interest-accumulating balance — from month to month.That's good to know, and wise credit card use will certainly be on a lot of New Year's resolution lists, but what about the debt already rung up?“I would start by looking at the interest rates being charged on your cards,” Wiest said. “Pay off one to get a feeling of accomplishment.Noorbakhsh advised tightening up the budget to free money to pay the credit card balance off as quickly as possible.An indebted person should find ways to squeeze more money out of his budget, he said.Noorbakhsh said decide what costs are essential — mortgage and insurance payments — and what are not essential — eating out five or six times a week. Eliminate the nonessential expenses and put the savings toward paying down debt.Bennett suggested that a holiday bonus should be used to pay off the balance on your credit card.She also suggested earmarking a tax refund to debt elimination.If necessary, transfer the balance of your current credit card to one with an introductory 0 percent interest rate, Bennett suggested.This introductory rate should last from three to 12 months. Once you have transferred your balance to the 0 percent card, she added, all your payments should go toward paying down the principal.These aren't radical ideas, Noorbakhsh admitted, but because of the prevalence of easy credit, today's consumers “can't tell the difference between income and consumption. To them it's a field of dreams, buying without paying attention to your income.”
But people must learn to make a budget and stick to it and to put something away in savings for emergencies — a major car repair or an illness, he said.Whether buying a car or a house or a pair of shoes, Noorbakhsh said, the watchword is “Buy what you can afford.“Liking something is not enough of a reason to buy something. Affordability is more important thing when making a buying decision.”Bennett said, “The holidays can wreak havoc on your finances if you're not careful, so always think before you buy. Attempting to 'keep up with the Joneses' is a very expensive proposition, and the more you overspend this month, the more you'll pay the price come 2017.”“If you stay within your spending budget, you will better enjoy the months that follow the holidays.“Keep in mind that the efforts you make to curb your holiday spending now will free up more cash for the upcoming year, which is the best holiday gift you can give yourself and your family,” said Bennet.
