Holiday Debt or a Happy New Year?
Opting for the “instant gratification” of purchasing items on credit can be a costly decision if the balance is not paid off when the statement comes each month. For example:
You purchase $800 worth of holiday gifts on a card with 18% interest rate. If you only pay the minimum of $16 per month, it will take you 94 months to pay off that balance. 94 months = 7.8 years! And, interest will continue to build on the unpaid balance, meaning that you will pay nearly $1500 for those $800 gifts!
Adding to the problem may be additional fees charged by the card for an annual card fee, late payment fees, cash advances, or over limit costs.
So what are some ways to avoid or minimize the cost of credit:
- Layaway - Make cash payments for items you have set aside over time. This is a service that is generally available at major retailers.
- Pay cash - Have a budget and stick to it. When the cash runs out, you are done shopping.
- Use envelopes for budgeting - Keep a limited amount of money in envelopes inside your purse. For example, if your per person budget is $100, have $100 in an envelope for each person and only spend their money (do not “rob Peter to pay Paul” by taking money from one envelope and placing in another). If there is money left over, save it for the future.
- Limit purchases - There is a saying for gift giving that goes, “Give them something they want, something they need, something to wear, something to read”. Having a framework such as that may help to keep family member lists to reasonable level.
- Give experiences versus gifts - This can be kept low cost by taking the young cousins to the ice rink (free in many areas) and then out for pizza, as an example. Making this special memory may be priceless!
- Pick a name - Everyone in the extended family draws a name and only buys for that person. Buy slippers for Uncle Mike versus buying for 25 people.
- Volunteer together - Volunteering as a family to help serve a meal to persons who are homeless, sort food at the food pantry, distribute coats to kids, or the like can help put things in perspective and raise awareness for all that your family does have. It puts much in perspective.
- Consider the cost of coupons - Coupons may actually not be a bargain after all as they may make you spend more. It is one thing to use coupons for discounts on things you actually need or want, but another altogether to buy things you don’t really like, want, or need just because they are on sale.
The holidays are a joyous time about being together. Keep spending under control so that you can truly have a Happy New Year!
The opinions expressed are those of the author. Seek professional advice before taking any action in regards to your finances.
Todd A. Slingerland, CFP®
6 Tower Place Albany, NY 12203 (518) 867-4000 x105 firstname.lastname@example.org www.capitalfinancialplanning.net