How to minimize holiday
Debt. You spit the word right out of your mouth when
you say it.
That's the reaction many of us have after seeing what
we've done to our credit card and bank balances each month.
That response is a good thing for most people
-- if you're naturally debt-averse, you're unlikely to end up in
bankruptcy proceedings because you forgot to pay the Visa bill.
It's good to learn early -- and cheaply -- that debt isn't always
your friend. Learning to manage what you owe can be the most rewarding
thing you do with your money.
During the holiday season, people tend to rack up
even more debt than usual. According to the National Retail Federation's
2004 holiday shopping study, the average American will spend 4.5
percent more this year than they did last year. We'll spend $541
on gifts and $161 on food, flowers, cards and decorations. Come
January, the credit card balances will only compound the post-New
Even though blowing a lot of dough on presents is
inevitable for most people, there are a few ways to keep your spending
Get in touch with your inner
Holidays can be difficult for even the
best money managers. People invariably go over budget as forgotten
or last minute gifts are needed in a hurry. Plus people more often
buy with their hearts than with their heads.
Guilt can also be a marvelous economic
motivator -- it's easy to think we can make up for a year's worth
of arguments or missed appointments by pushing the gift exchange
just five more dollars. Five bucks may not sound like much, but
money has a great ally and a great enemy in Father Time.
Think about the following scenario the next time you're
about to drop a few extra dollars on a present.
One family socks away $5 per month, every month, for
30 years. The other routinely spends all that they earn, plus another
$5, every month for 30 years.
At the end of the first year, family No. 1 has just
over $61 ($5 times 12 months plus, by putting their savings into
an interest-bearing account offering 5 percent, they add a little
more than a dollar to their total savings).
Paying an annual percentage rate (APR) of 18 percent,
family No. 2 already owes more than $65 -- and they likely owe even
more since credit cards use the least advantageous method of "average
daily balance" to determine the amount to which they will charge
After 10 years, the first family has stashed away
about $775. Meanwhile, the second family is now nursing a debt load
of more than twice that (roughly $1,650) just by adding a mere five
dollars per month to their debt.
Shoot these projections out 30 years and the results
are dramatic. The first family will have saved more than $4,000
while the other family now owes over $70,000. It's pretty
amazing what a difference just $5 saved or spent can make over time.
Someone was once asked by a surprised friend, "How
did you go bankrupt?" The answer: "Slowly at first, and then all
of a sudden."
This year, after making out your holiday shopping
list, make a budget and stick to it.
Be credit card savvy
Credit card advertising is very seductive. With
card A, you'll always have enough money. Use card B and people will
respect you. Actually earn money or frequent flier miles on every
purchase with Card C.
Credit cards allow you to charge
your way into wealth, respect and prosperity. Now that's
Plastic can make buying a gift you can't afford seem
easier. The money may not be in your bank account now, but you just
got an increase on your available balance and it IS the holidays
and you promise to pay it off in January and gifts are good, right?
And ... the excuses go on.
Beware of such banter with yourself.
The best laid plans can still go awry. The Consolidated
Credit Counseling Services, a nonprofit organization that helps
people solve money management and debt problems, found in their
2004 holiday survey that 39 percent of the consumers were still
paying off the previous years holiday spending debt.
The first, and easiest, step to using credit cards
wisely is not to charge more than you can afford to pay that month.
Failing that, make sure that you pay more than the minimum. We've
seen the power of five little dollars -- sending in just $5 or $10
more per month can reduce the time and total amount of interest
you pay significantly.
on time with your payments every time. Paying on time can help
you qualify for the best interest rate available. Find out what
rate you're paying now and if you think you can do better, ask
your credit card issuer to lower your APR. There's a pretty
good chance they'll agree. They'd rather do that than lose you --
and all your interest-paying dollars.
If they call your bluff, the Internet has made shopping
for alternatives easier than ever. Try Bankrate's credit
card search engine to find the card that fits your needs.
Debt -- it's not always so bad
Debt is not necessarily a bad thing. It's a
Debt makes it easier for us to
buy a home, a car or a DVD player. It allows us to smooth out irregular
purchases by paying a set amount each month and we don't have to
carry around an inconvenient wad of cash.
Debt can, in fact, be a marvelous
force for good in our financial lives -- if respected and used wisely.
You owe it to yourself, pardon the pun, to shop around
for the best interest rates and annual fees on your credit cards,
car loans and other obligations, and to spend within your
limits, especially during the holidays. That way, the only thing
you'll have to worry about reducing this January is your waistline.
-- Updated: Oct. 25, 2004