Plan Ahead to Avoid a Financial Holiday Hangover
Does this scenario sound familiar? You use credit cards to do your holiday shopping, promising yourself you’ll pay the debt off within two or three months. Six or eight months later (or more), you’re still paying, and those items that seemed like such bargains end up costing you 10 to 20% more than you thought thanks to the credit card interest.
For many Americans, this debt pattern is repeated year after year. Personal finance experts call this the “holiday hangover.” There are times when incurring credit card debt makes sense, but holiday gift-buying is not one of them. Using credit cards often leads to impulse spending, overspending, and increased debt.
A better approach is to save small amounts of money throughout the year in a special holiday gift fund. Make a list of all the people you’d like to give gifts to and how much you can afford to spend on each one, and then pay cash from the savings you’ve built up. When the cash is gone, you’re done shopping.
If you find it difficult to save money throughout the year you can join an old-fashioned Christmas Club, still offered by smaller community banks and credit unions. You put a small amount of money which is often deducted automatically from your paycheck, into a special Christmas Club account at your bank. The account usually earns interest at the regular savings account rate. In October, November, or December, the money gets transferred to your regular checking account and you’re ready to go shopping!
Don’t have a Christmas Club account where you bank? Don’t worry, it’s just as easy to create your own. If you want, you can simply open a new savings account at the bank and use that as your own Christmas Club account. You can set up direct deposit from your paycheck to fund the account or set up a recurring automatic money transfer into the account. But keeping the money in an easily accessible account at your bank can be tempting to dip into when money gets tight, so you might want to open a separate online savings account. By doing so you’re going to earn a little more interest and hopefully keep the money out of sight so it’s a little less tempting to tap into.
How to Avoid A Financial Holiday Hangover This Year
Here are four simple steps to help you stay out of debt this holiday season and avoid that financial holiday hangover.
1. Set spending limits.
Look at your monthly budget and figure out how much you can realistically afford to set aside towards holiday gift giving without going into debt. Your intentions may be good, but the reality is that most people have a depressing amount of debt after the holidays and are not able to pay it off in as timely a manner as they had hoped.
2. Make a list.
Follow Santa’s example. Make a list of all the people you need or want to buy gifts for, including small gifts for babysitters, teachers, newspaper deliverers, etc. These small gifts can add up and are often the cause of going over your gift budget. Include money you’ll spend on Christmas cards, postage, holiday parties, decorations, holiday entertainment, etc. Just like budgeting your household expenses, you need to budget for all of your holiday expenses.
3. Set a limit.
Decide how much you will spend on each person on your gift list, then add everything up and make sure it doesn’t exceed your overall spending limit. Try to allow a cushion for unexpected items or price fluctuations, but be firm on your limit. Sure, you might come across a last-minute gift you just need to have, but if you don’t stick to the limit the whole exercise is worthless.
4. Decide where to shop.
As important as deciding what you’re going to buy is deciding where you’re going to buy it. If you don’t wait until the last minute, you’ll have time to comparison shop. Prices fluctuate significantly from store to store and from one month to another. Stores start cutting prices 10 to 25% on holiday items like decorations, gifts, and winter clothing the week before Thanksgiving.. As Christmas approaches, some items are marked down as much as 40% but selections are limited. You’ll need to decide whether price or selection is more important to you and time your shopping accordingly.
Don’t neglect online retailers. Online shopping is very popular these days and there are plenty of deals to be found. In many cases you can even find low prices with free shipping. What’s better than taking care of your holiday shopping from the comfort of your home instead of fighting the crowds?
Follow these simple steps and you’ll avoid the nagging feeling that you’ve overspent on Christmas or other holiday gifts. You’ll also avoid the struggle to pay off the credit card bills for months to come. Instead you’ll feel in control and free of the dreaded financial holiday hangover.
About the Author: Jeremy is a retirement planning specialist and founder of Generation X Finance and the guide to Financial Planning at About.com. To learn more, follow Jeremy on Twitter.
Source: Gen-x Finance