The gifts have been exchanged, family has come and gone and now you are left with the task of consuming all those leftovers, and putting away your holiday decorations. For many Americans, despite completing these important post-holiday tasks, Christmas will be hanging around a lot longer than they’d like in the form of the dreaded Holiday Spending Hangover.
My palms get all sweaty just thinking about it.
Here’s a not so fun fact: In a financial literacy survey conducted by Standard & Poor’s, the U.S. tied for 14th globally, well below Canada and the United Kingdom. Then, it shouldn’t come as a surprise that while 65 percent of Americans give themselves a holiday budget, only about a quarter of them will stick to it, with over 77 percent of people overspending.
For many consumers, recovering from their holiday spending hangover is as simple as cutting back on eating out, reducing their grocery budget and perhaps pausing contributions to their savings accounts. For others who end up delaying bills or barely making minimum payments on credit cards, the holiday spending hangover is indicative of a much bigger problem.
Sorry, Brenda, “hair of the dog” isn’t going to help you out here.
As much as you may want to take an “if I can’t see it, it’s not there” approach to your financial situation after the holidays and continue spending haphazardly, the new year is the perfect time to plan to get your bank account into shape and bulk up that savings account.
The “B” Word
Budget. It’s not a bad word! Although being more restrictive will help get you from point A to point B much more quickly; oftentimes, it can be a recipe for disaster, and perhaps that is why so many people give up. The financial website “Workable Wealth” makes a great point:
“Budgets are like diets: the more restrictive you are, the more likely you’ll rebel. An overly strict budget can be the very reason why you inhale an entire box of donuts when you happen upon them in the office, or completely blow way too much money on an impromptu shopping spree.”
Keep it Simple
A budget is a tool for you to make your money go to work for you, not to take away every shred of joy in your life! It’s as simple as recording three things.
$ 1. Income $ 2. Expense Categories $ 3. Balance
Now, how many expense categories you have is up to you. You can be as general or as specific as you like, but the key is to have a “spending money” category with a reasonable amount allocated to it to help keep you on track with telling the rest of your money where to go.
Was your debit or credit card smoking from being swiped so much during your holiday shopping? That’s not too surprising because it’s just so easy to swipe your card (or nowadays, pay with your phone–which I admittedly find to be way too convenient). Multiple studies have found that people are more thoughtful with their spending when using cash instead of a card. Watching the money physically leave your wallet is much more painful than swiping your card. Consumers who use cash are far less likely to make impulsive purchases.
What’s the easiest way to do this? Sure, it sounds old school, but for day-to-day spending consider the tried and true “envelope system.” Take a look at your budget and your spending: expense categories like transportation, food, entertainment, etc., and create an envelope for each. Withdraw cash in the amount you have budgeted for those categories and fill your envelopes each payday. But, remember, when it’s gone, it’s gone – and don’t lose your envelope! Maybe you don’t need that daily breakfast burrito at the coffee shop after all.
The goal with the budget and putting ourselves on a “cash diet” is to have our income exceed our expenses. If it doesn’t, tighten that belt and get to work on any debt payments to tip the scales in the right direction.
The “D” Word…(hint, it’s not Diet)
More bad news: The Federal Reserve keeps tabs on consumer debt and reports that in September of 2018, U.S. consumers surpassed the previous month’s record of $3.94 trillion by 3.3 percent at $3.95 trillion. Ouch. For many Americans, myself included, it can be painful to take a long hard look at the numbers, but laying it all out can be key to your success. You don’t have to be a spreadsheet master to get it done either! You can use tools like undebt.it—a free, mobile-friendly debt payoff calculator that generates an easy-to-follow payment plan, so you can finally eliminate your debt. Let me mention it again, it’s free!
Snowball or Avalanche?
No, I’m not trying to name my next white, fluffy, Alaskan Husky puppy (hint, hint to my husband). These are actually specific methods you can use to pay off your debt.
Paying the lowest balance off first
If you need a quick win, the debt snowball is the way to go. Make additional payments on your smallest loan and paying it off quickly will give you the momentum you need to keep pushing. Once that balance is paid off, apply the payment amount of that loan to the loan with the next lowest balance. The higher payment will help you pay that one off faster and your snowball grows as you pay off each debt, eventually wiping it out.
Pay the highest interest rate first
The method that makes the most sense numbers-wise is the debt avalanche. The debt that you pay off first is the one with the highest interest rate. When you’ve paid off the debt with the highest interest rate, move on to the debt with the next-highest interest rate. Fidelity Investments provides the following example. Paying only the minimum payment of $234 on a $10,000 credit card balance with an annual percentage rate of 16 percent will take five years and four months to pay off, and cost you nearly $5,000 interest. Conversely, if you could pay $300 a month on that debt, you’ll save almost $2,700 in interest and pay it off in three years and nine months.
Keep Track and Reward Yourself
With tools like undebt.it (Yes, I use it, love it, and promise I am not being paid to say so!), tracking your progress is easy and rewarding. Seeing how much you’ve paid off is incredibly motivating. Set milestones and reward yourself (reasonably) when you reach them. Positively reinforcing this behavior will help you stick to your plan and get those debts paid off.
Put your Savings on Autopilot
Many people have retirement accounts through their employers. Essentially not having to do much other than sign up and choose your funds are what make them so successful. Before you even see it, the money is transferred into your retirement account. The saving is automatic, so why not apply this methodology to your regular savings or money market account? Set yourself up for success by establishing a recurring transfer from your checking to your savings or money market account before you’re tempted to spend it. Give yourself a reasonable goal. You could easily save $5,000 a year by transferring just $415 a month into savings.
Starting in January, with as little as just $20 a week, you could have over $1,000 saved up for Christmas 2019.
Next Christmas is an entire year away, but do yourself a favor and start saving today!
By starting in January, with as little as just $20 a week, you could have over $1,000 saved up for Christmas 2019 holiday spending. Also, check with your bank or credit union to see if they offer a holiday club savings account. These “Christmas Clubs” are interest-bearing, short-term accounts that don’t allow you to access the funds without penalty until a certain date closer to the end of the year. By restricting access and penalizing you for withdrawing early, a holiday club account is another way to keep you on track to have the funds on the ready for the holidays.
With a combination of old-school tactics like the cash envelope system and apps and technology like undebt.it and online banking (mixed with a little willpower), you could be well on your way to healthier finances in 2019.
By: Candice E. Schlautmann for 82801