For most of us, the holiday season is a few weeks into the past. We have some happy memories, but the joy of the holidays is already long gone as we start a new year and move through the rest of the winter season.
In many mailboxes, bills from the countless expenses of the holiday season are starting to arrive. People used their credit cards for gifts, food, flights, hotels, gasoline, and all of the other expenses that often come with celebrating the holidays. Even people who are otherwise pretty smart with their money are sometimes facing credit card bills this time of the year.
We’re no different. Our January credit card bills are usually the largest of the year thanks to all of the expenses that the holiday season delivers to us.
We’re thankful that we’ve planned ahead for this and we can pay off the entirety of these debts, but that’s certainly not true for a lot of Americans. Many Americans simply find themselves launching the new year with an uncomfortable level of debt because of the just-past holiday season.
What can you do when you’re usually in good financial shape but you’re facing this sudden burst of debt? Here are eight strategies for handling that debt.
1. Focus on the highest interest debt.
You should always make the minimum payments on all of your debts, but if you have debts spread across multiple credit cards and loans, your focus should be squarely on whichever debt has the highest interest rate.
This is the fundamental principle of a debt repayment plan, which is simply an organized list of your debts so that you always know which debt you should be focused on. My recommended debt repayment plan organizes your debts by interest rate, with the highest interest rate debt always at the top of the list.
That top debt should be your focus. It should be the one that draws all of your extra money and attention because it’s the one that’s draining your wallet at the fastest rate.
2. Always pay more than the minimum on your “focus” debt.
This is the key to getting rid of high interest debt. You absolutely have to be making more than the minimum payment on whichever debt you’ve chosen to focus on.
Let’s say, for example, that you have a credit card with a $2,500 balance on it that has a 19.9% interest rate on it. The minimum payment is $66, and if you kept that up for sixty one months, you’d pay off that card. The only problem is that you’ll be paying $4,026 in order to pay off that card. $1,526 goes completely to interest – you get nothing for that $1,526.
What happens if you bump that monthly payment up to $116 – just adding $50 more a month? You cut your payoff time down to just 27 months, but even better, your total payment is $3,132. You’re only paying $632 in interest over the course of that loan.
By simply paying $50 more a month, you pay off that debt almost three years earlier and pay a total of $894 less in interest on that debt.
Addressing your debts head-on with as much extra payment as you can will save you money – a lot of money.
3. Purge your closets.
One powerful step that anyone can take to get a big boost against their debts is to simply dig through their closets and sell off some of their unused stuff.
One great way to start with this is to look at your recent holiday gifts? Are there any items that are just sitting there unopened that you’ll probably never use? Maybe you got a duplicate of something you already own or a gift that just doesn’t match who you are (such as a hamburger press given to a vegetarian).
The other technique is to simply go through your closets and other storage spaces, like your attic and the rafters of your garage. Pull everything out and go through it, asking yourself along the way whether you really need to keep this stuff.
I go through our closets and storage spaces twice a year – once in the spring and once in the fall. Each time, I ask myself whether there’s a realistic chance that I’ll ever use or re-use this stuff. I find that at first it’s easy to convince myself that I’ll use the item and put it back in place, but when I see something I haven’t used for the third or fourth time, it’s a lot easier to consider that I’m probably not going to use it and that I should sell it off.
Whenever you identify some items that you can sell, the best place to start is Craigslist, as it allows you to sell locally (meaning no shipping issues) and almost everything eventually sells on there. I do use eBay for specific collectibles, but for most items, Craigslist is just easier.
One big tip: price things to sell. Don’t worry about maximizing your dollar or you’re going to wind up having to re-list things and spend a bunch of time dealing with it just to earn a few extra dollars.
Once you’ve done your selling, take the proceeds and apply them to your credit card with the highest interest rate. You’ll immediately cut the balance and, even better, you’ll reduce the interest you’ll be paying on that debt.
4. Transfer that balance and consolidate.
In an effort to drum up business, many credit card companies offer balance transfers where, if you sign up for their credit card, they’ll allow you to transfer the balance of one (or more) of your other credit cards to that new card, usually with a 0% interest rate on that transferred balance that lasts for a long while, as much as eighteen months.
There are many variations on these kinds of offers. Some of them simply defer the interest for eighteen months on any portion of the transfer that you didn’t pay off. Other offers simply don’t count the interest at all. You’ll need to study the specific balance transfer offers available to you.
Want to find one? The easiest method is to simply visit the website of a major credit card provider such as Chase, Citi, or Bank of America and see what they have to offer.
The trick here is to not forget about the money you transferred just because you’re not paying interest on it right now. When including such debts in my debt repayment plan, I usually subtract 1% from that debt’s normal interest rate for each month left on the balance transfer. This isn’t a hard rule, just a little tool I used when repaying my debts to keep track of balance transfer offers and switch my focus to them when appropriate.
So, for example, if I’ve transferred a 20% interest and have 6 months left, I count it as having a 14% interest rate. If I have a debt that’s at 13%, I’ll focus on that at first, but when the end of the balance transfer gets close, I’ll switch my focus.
The key here is to keep that high interest at bay and using that breathing room to knock some of your debts down. If there’s anything that’s going to really drain your finances and make it hard for you to succeed financially, it’s high interest rates. They simply sap your money.
5. Cut back in smart ways.
Cutting back often gets a bad rap. People often immediately think of their favorite splurge – the one that they really value – and associate “cutting back” with losing that particular splurge, so they think of it as miserable.
That’s the wrong perspective to take. You should focus your efforts in cutting back on the areas of your life that are less important to you, not more important.
Focus on things like the light bulbs in your home. Replacing them with LED bulbs will end up saving you at least $100 per bulb over the lifespan of the bulb.
Focus on things like your laundry detergent or your soup crackers or your dishwashing soap or your canned tomatoes. Buy those things in generic form, as the generic version is often functionally identical to the name brand version.
Focus on things like driving a little less. Take the train into the city once in a while instead of driving. Talk to a friend about carpooling a few days a week, saving you a portion of your commuting costs.
Focus on things like the temperature in your home. Play around with different settings, like lowering the temperature a few degrees in the winter and raising it in the summer. Look for places where you feel a draft, find where that draft is coming from, and figure out how to seal it up.
In other words, focus on cutting back hard on the things that don’t matter so that you can maintain the things that do matter.
Notice I used the word “maintain” there. When you’re cutting back in some areas, you’re going to have more money available to you. Don’t use that money to elevate your life. Instead, use it to get rid of those holiday debts and, when they’re gone, use it to improve other areas of your financial life, like building an emergency fund, saving for a down payment, launching your retirement savings, and so on.
6. Stop using your credit card (for a while).
It’s the convenience of the credit card that often gets people in trouble. They see something that they want, whether it’s a perfect holiday gift for someone or perhaps something they want for themselves, and they simply buy without thinking too much about it. If they think about it at all, they just assume that their future self will pay for it.
That’s a huge mistake, and it’s one that’s fueled by the ease of use of credit cards.
Again, the key here isn’t to deny yourself the things that you want. The key is to be more mindful of the things that you’re actually spending your money on. Is this thing you’re about to buy going to be something you’re really going to use a lot? Or will it wind up stuffed in the closet in a month or two? Do you really need this item of clothing? Do you really need this new book or this new game?
You don’t have to completely abandon purchases or talk yourself out of everything you might want. Instead, just spend more time thinking about whether or not you want the things you’re spending your money on.
The easiest way to reintroduce mindfulness into your purchases is to use a few simple rules for purchases. I use two: the ten second rule and the thirty day rule.
The ten second rule is something I use for small purchases, say, ones under $10. If it’s not a completely planned purchase – like something on my grocery list – I hold it in my hand for ten seconds while I think about whether I really need it. Is there something else smarter I could be doing with that money? Is there another way to get whatever it is I’m hoping to get out of this item?
On the other hand, the thirty day rule is something I apply to all purchases over that ten dollar threshold. If it’s not an absolute necessity (or not a truly exceptional sale that I will lose if I wait), I don’t buy the item for thirty days. I wait on it. Often, my desire to buy that item will pass.
It’s also useful to delete your credit card numbers and account information from your preferred web browser. This forces you to take the time to re-enter this information each time you’re considering a purchase. Consider it a way to enforce the ten second rule mentioned above.
7. Use annual bonuses and tax returns for debt repayment.
Some people receive an annual bonus from their employer in December or January. Others receive a tax return in the first few months of the year. Some receive both.
While it’s tempting to look at that money as a windfall with which to buy lots of fun items, step back for a moment and look at the big picture. These kinds of windfalls actually give you a unique opportunity to take care of those pesky debts and get your financial house in order.
So, instead of tossing all of that little windfall into whatever splurge you had in mind, consider instead putting some or all of it toward your highest interest debt. You might even be able to eliminate that debt in one shot.
While it can be kind of painful to turn away from a long-anticipated splurge, the benefits of doing this are many.
For starters, your bonus or tax refund will begin paying dividends immediately – and those dividends will last. You’ll no longer have that credit card payment to deal with (or it’ll be highly reduced), which means that you’ll have more breathing room each month. Your stress level will go down since you don’t have that debt to deal with.
Basically, it’s a method of taking a sledgehammer to your debt.
8. Live without your raise.
One final strategy revolves around the cost of living raises that many employers give out at the end of the year to their employees. Often, this raise amounts to a 2% to 3% bump in pay.
Consider simply living without that raise. Note the difference in your new paychecks versus your old paychecks and use that difference to dig yourself out of debt.
This year happens to be a very good year for trying out this strategy. Low gas prices means that many people are already spending a little less than they expected, so even if inflation hits the other things you buy a little bit in the coming year, the lower gas prices will help take the edge off.
Figure out how much extra you’ll be bringing home in the form of your cost of living raise each month and tack that on the payment of your highest interest debt beyond the minimum payment. For example, if you discover that your twice-monthly check went up by $30 due to a raise, then just add $60 as a bonus to your debt payment each month.
This little change won’t affect your standard of living much at all, but it will certainly accelerate your debt repayment. Stick with this throughout the year and even keep it going into the next year. You can even add together two or three years of raises in this way.
There’s also another little hidden bonus to this strategy: it keeps lifestyle inflation at bay. As people see an increase in their pay, they’re often tempted to raise their material lifestyle in parallel. Beyond a certain minimal point, that’s usually a mistake because it leaves you in a situation where your spending far outstrips your means if you ever hit a bump in the road. You are far better off keeping your spending at a reasonable level and use your raises to ensure your long-term financial future.
Finally, let’s take a moment to look ahead to the holiday season that will cap this year.
Start Preparing Now to Avoid This Debt Next Year
You know that the holidays are going to come again at the end of the year. You know that they’re going to bring extra expenses along with them. So why not start preparing now?
Personally, I like the “Christmas club” strategy, named after a special savings account that my family’s bank used to offer when I was a kid. With that account, if you deposited $10 or $20 each week for 49 weeks into this account starting in mid-December and continuing into late November of the following year, they’d make the fiftieth payment and give you the total value of that account – $500 or $1,000 – at the beginning of December. That was perfect timing for holiday spending.
You can implement this yourself by simply transferring $10 or $20 (or $50 or whatever you need) per week into a “holiday” savings account designed to cover gifts, travel, meals, and other holiday expenses. I highly recommend setting up an account with an online bank like Capital One 360 for this purpose. Set up an automatic weekly transfer to take that small amount out of your account each week.
If you do that for fifty weeks, $10 will turn into a bit more than $500 (thanks to interest) and $20 will turn into a little more than $1,000. If travel is in your holiday plans, you might want to consider $50 a week, which will add up to more than $2,500 over the course of fifty weeks.
This simple plan will take care of a ton of holiday stress at the end of this year and will prevent you from re-reading this article again next January.
There was a time in my life when I truly dreaded the holiday bills. In fact, it was the post-holiday bills in early 2006 that led directly into our financial meltdown. It was that low point that started our financial turnaround that led us to the debt free lifestyle we enjoy today.
Managing holiday expenses is actually a big part of maintaining that debt-free life. It is so tempting to overspend during the holidays, but that overspending can haunt you for a very long time.
Here’s your plan: work very hard this year using the strategies above to get rid of your holiday debt from last year. At the same time, implement a “holiday savings” strategy so that you don’t fall into this trap again at the end of this year.
Next January, you’ll find yourself in a much, much happier position.