Paying Down Debt after the Holidays
Dec 09, 2016
Holiday debt can quickly haunt a new year. According to Gallup, $830 is the average amount each American adult is expected to spend on Christmas gifts in 2016. Interviews also found that 30% of Americans are expected to spend over $1,000 on gifts. When you add in the additional spending on decorations, parties, greeting cards, baby sitters, travel, and holiday apparel purchases, credit card debt increased by an average of $983 for holiday spending in 2015.
How can you get a handle on holiday spending and debt? The simple solution is to set up a budget and stick to it. A budget will help you track your expenses and help you resist the temptation to splurge. Budgets also help you anticipate and save for future expenditures.
It’s probably too late to budget for Christmas 2016, but it’s not too late to devise a plan to pay off the 2016 Christmas debt and save for Christmas 2017.
There are two “debt payoff” strategies suggested by Dave Ramsey in his financial strategies course known as Financial Peace University. Dave calls these debt pay off strategies Debt Snowball and Debt Avalanche.
- Debt Snowball works like this – Pay off the lowest balance credit card first. Then the second lowest and so on. Assume you budget to pay $500 per month to relieve your credit card debt, here is an example of how this works: You have three credit cards. The first card has a $1,000 balance and the second card has a $2,000 balance. The third credit card has a $3,000 balance. You pay the minimums each month on credit cards two and three. You pay the remainder of the $500 monthly allocation to first card until it is paid off. Then you pay the minimum on the third card and the remainder of your $500 allocation goes toward the second card.
- Debt Avalanche is another method that goes for the fastest overall way to pay at the least amount of cost. Here is how it works. Just like in the previous example you have three credit cards, with the same balances; except in debt avalanche you identify the card with the highest interest rate. Let’s assume in this case the third has a credit card balance of $3,000 and a 26% interest rate. The second has a $2,000 balance and a 24% interest rate and the first has a $1,000 balance with a 22% interest rate. Assuming you have $500 allocated to pay off credit card debt, then you will pay the minimums on cards one and two and everything else goes to pay off your highest cost card, the third card.
Let’s think ahead to Christmas 2017. You still need to have a budget and a plan to pay for those bills. Using your 2016 Christmas list, figure out how much you will likely spend in 2017 and divide by the likely amount of months you can save. (That all depends on how quickly you pay down your existing debt.)
Here are some other ideas about holiday shopping to consider:
- Shop during the year and hold onto gifts.
- Shop major sales – consider post-holiday sales in 2016 for items you can use in 2017.
- Shop online for additional discounts.
- Consider “charitable donations” made in the name of the hard-to-shop-for relative or friend.
When your debt load becomes overwhelming, you may need professionals to help you. Call the local non-profit consumer credit counseling service. If there are none in your area, you can go to www.nfcc.org to find counseling assistance. They’ll work with you to create a budget to get your debt under control.
CFP®, FLMI, Annuity Product Manager
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